Deciding whether to Integration of integrate the poor into the mainstream financial market is a like a

double-edged sword for banks. On one hand, excluding them denies banks the opportunity to tap into
the so-called fortune at the bottom of the pyramid a huge number of low income customers that
could collectively serve as a great revenue opportunity. On the other hand, integrating them creates a
challenge for banks to provide services to customers at a low cost and also poses a huge risk in terms of
increasing their Non-performing assets.

Typical customers of inclusive finance have several barriers that prevent them from entering the formal
banking sector. These include lack of proper identification, no transaction trail and unavailability of
cashable collateral which are usually the minimum KYC requirements of formal institutions. The
institutions also regard them as high risk and low value customers and hence show little interest in
creating products suited to their needs. These customers traditionally rely on means such as hand loans,
pawn shops and money lenders who often exploit their illiteracy, gullibility, and desperation to charge
high rates and drain them of their hard-earned resources by even cheating on them.

The issue with the poor is that they are even more vulnerable to financial setbacks, as these can
completely decimate them. They need products with safety nets to protect them from the volatility of
the market. The poor are often lured into the financial system through attractive measures like no down
payments, teasingly low and adjustable interest rates with clauses in fine print preventing foreclosures
thus making it almost impossible for them to exit the vicious cycle of debt and poverty.

I had the notion that informal financial institutions like Grameen and SHGs were driven more by a sense
of charity, but I have learnt that these institutions can actually make profits for themselves by catering
to a segment that is mostly ignored by the formal sector. Their models involve distrust and coercive
collection, charging high interest rates, a no-nonsense approach to forming and disciplining groups, and
strict collection of loans.

The above models may be criticized for their seemingly detached and stern approach. However, these
are preferable to money lenders as issues get recorded and redressed in a fair manner. They provide a
fair means for individuals to get loans on pre-set terms. While frequent repayments makes the system
robust, it also makes it difficult for the poor to meet these requirements in case of an emergency. There
is no flexibility to cater to an individuals specific requirements as the group is the driving force.

Self Help Groups address this drawback to some extent through focus on savings, a model of non-
standardization and mutually reinforcing trust. These provide the customer a chance to interact with the
formal system through the groups savings account, a paper trail and an opportunity to scale and enter
the formal financial system. The models focus on women and small scale entrepreneurs significantly
empowers women and benefits the society as a whole.

However, the cost of group formation is high and scalability is questionable. Also, SHGs are more likely
to come up in areas where there is penetration of formal banks. This leaves the problem unsolved for
people in rural areas with no access to banking at all, and also makes people dependent on others to
form groups. Group based lending is also a dilemma as the customer has no means to get a loan
individually, and in a group he has to be additionally accountable and pay to cover potential funds as
well as losses for others even if he later decides not to take loans.

Schemes such as the PMJDY seem to be the answer from a policy makers perspective, but need to
improvise significantly in order to bring real, tangible change in the lives of the people and truly include
them in the formal financial sector. Merely achieving a target of opening a certain number of bank
accounts does not imply inclusion. Instead, the number of such accounts being actively used should
measure the schemes success. The government needs to integrate various savings instruments, build
infrastructure and get people to trust technology as well as the formal sector in order to truly create a
financially inclusive society at all levels.