Nudging towards financial inclusion in India

Monday, September 8, 2014

The Union government recently launched a massive financial inclusion programme with a view to improve access to formal finance. In this context, it is crucial to understand not only the importance of universal access to formal finance, but also the effective ways of achieving the same.

Peer-reviewed and econometrically-careful academic research has shown that a programme that nudges households to open bank accounts increases their dealing with the formal financial system. More importantly, research has pointed out that such effects tend to persist for longer periods of time. However, in the presence of many types of constraints such as lack of awareness, poor infrastructure, law and order issues, etc, access to finance may not be enough for achieving the goal of alleviating poverty. Nevertheless, this is a good beginning towards addressing one important problem.

It is not very hard to convince people that lack of access to formal finance is a real problem plaguing the poor in India. If one steps out of home and interviews street vendors, some startling numbers are revealed. A vegetable vendor that I spoke with has the following business model: Borrow R900 in the morning; buy vegetables; sell them; return R1,000 to the lender and keep the balance, if there is any, that is. In other words, he borrows at 11.1% a day. At this rate, obligation doubles approximately every five-and-a-half days! You will hear similar stories from poor people who get admitted to private hospitals after being told by government hospitals that the required facilities are not available.

Source: Financial Express (link opens in a new window)

financial inclusion