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.
