A ‘regulatory lab’ for financial inclusion: 

A ‘regulatory lab’ for financial inclusion: 

Context:

In a recent report, the Reserve Bank of India’s (RBI) household finance committee found the average Indian household keeps just 5% of its wealth in financial assets.

Introduction:

• Most is held in real estate and gold.
• In times of emergency, half of households turn to family, friends and moneylender.
• In July 2017 report, “Indian Household Finance”, found many barriers to participating in the formal financial system, many are supply-side frictions.
• India’s low participation in the formal financial sector is unusual compared with households in other countries.
• Globally, technological innovation is bringing more customized solutions to market for underserved households.
• Technology can reduce supply-side frictions by lowering cost, enhancing trust, and improving access at a massive scale.

Safe zone for innovation:

• The recent report offers several recommendations for fostering the introduction of more customized financial products to meet Indian households’ complex needs.
• The report calls for a more flexible regulatory process to encourage more financial innovation.
• One promising recommendation is to set up a “regulatory sandbox” to allow innovators to test new products and services in a controlled, yet live, environment

What is Sandbox?

• A sandbox is a safe zone where regulators facilitate small-scale roll-outs of new products to real customers without serious risks to consumers or financial stability.
• Regulators impose a variety of security and customer safeguards on companies participating in a sandbox, including enhanced disclosures, dispute resolution programmes, and customer compensation plans.
• Through the testing process and the empirical evidence gathered therefrom, a sandbox could facilitate proactive policy making and remove some regulatory uncertainty.
• Regulators in countries like the UK, Singapore and Australia are using sandboxes to evaluate the risk of new products and technologies.
• It opens the door to even more innovation and competition, not just sandbox participants.

What measures need to be taken to encourage increased investment in financial assets?

Measure to be taken:

1. Increase in Interest and credit rates.
2. Gold Monetisation scheme such as Sovereign Gold Bond Scheme be promoted at a higher interest rate.
3. State involvement is must. States should encourage local municipal and panchayats to open branches and ATMs in Rural and Semi-Urban areas.
4. RBI need to come up with a policy to limit any hassles of opening new branches by banks, allow more scope for innovation measures, limit regulatory clarity on launch of products, new stocks and funds relating to renewable energy, finance  etc, reduction of repo and reverse repo rates.

What is financial inclusion?

• Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.

Challenges for financial inclusion:

While there has been progress toward financial inclusion, significant challenges remain:

• An estimated 2 billion adults worldwide don’t have a basic account.  
• Globally, 59% of adults without an account cite a lack of enough money as a key reason, which implies that financial services aren’t yet affordable or designed to fit low income users.
• Other barriers to account-opening include distance from a financial service provider, lack of necessary documentation papers, lack of trust in financial service providers, and religion.
• More than 200 million formal and informal micro, small and medium-sized enterprises (MSMEs) in emerging economies lack adequate financing to thrive and grow.
• MSMEs cite a lack of collateral and credit history, and business informality as main reasons for not having an account.
• Some groups are more financially excluded than others: Women, rural poor, and other remote or hard-to-reach populations, as well as informal micro and small firms are most affected.

Government schemes for financial inclusion:

• The government of India recently announced “ Pradhan Mantri Jan Dhan Yojana”, a national financial inclusion mission which aims to provide bank accounts to at least 75 million people by January 26, 2015.
• Several Startups are working towards increasing Financial Inclusion in India by organising various large unorganised sectors where payments primarily happen in Cash, instead of a bank transaction.
• Recently, the government of India came up with a policy under the name “rupee exchange” to exchange higher notes with the intent of: clamping down on tax defaulters, track down corrupt officers ( by rendering valueless heavy cash stashed away secretly) and generally restoring sanity to the economic system.
• Pradhan Mantri Jan Dhan Yojana: Indian Prime Minister Narendra Modi announced this scheme for comprehensive financial inclusion on his first Independence Day speech on 15 August 2014.
• In India, RBI has initiated several measures to achieve greater financial inclusion, such as facilitating no-frills accounts and GCCs for small deposits and credit. Some of these steps are:

1. Opening of no-frills accounts: Basic banking no-frills account is with nil or very low minimum balance as well as charges that make such accounts accessible to vast sections of the population. Banks have been advised to provide small overdrafts in such accounts.
2. Opening of branches in unbanked rural centres
3. Simplified branch authorization: To address the issue of uneven spread of bank branches.

Way ahead:

• Technology offers a means to deliver financial services directly to consumers in a much more frictionless manner.
• Technology is evolving fast, and regulators need a more efficient approach to understand new models, protect consumers, and ensure the stability of the financial system without choking off innovation.
• A regulatory sandbox provides a platform for testing, learning, and adapting—striking the right balance between fostering cutting-edge innovation and the policy objectives of stability and inclusion.