How Modi hampered the free will and trust based Financial Inclusion process?


2016 year-end was different for all Indians as we were all eagerly waiting for our PM Modi to speak out his mind after his much controversial Demonetization announcement on 8th Nov 2016. It was the end of the 50 day period, that the PM wanted, to restore the normalcy in lives of people from the effects of demonetization. While the fact that PM’s speech was fact-less (without the numbers proving the benefits of demonetization) was discussed in depth by the nation – we all missed out on the impact that demonetization caused on the free will and trust based financial inclusion process.

Let’s start from basics – what is financial inclusion? Financial inclusion aims to deliver financial services at affordable costs to all sections of the society, especially the low income and disadvantaged sections. It is pushed by United Nations and almost all countries across the world as a major agenda due to its direct correlation to poverty. In India, this was taken up as a major agenda by the central bank several years ago and RBI has been driving several regulations (like priority sector lending) and reforms (like payment banks) towards this goal. Ultimately financial inclusion will help government in drive inclusive growth at higher efficiency and a lesser cost (monetary transaction cost) for the welfare schemes.

Till now financial inclusion was driven by RBI using its tools to regulate the market makers (banks, NBFC, MFC etc.) in the financial system. Within the set regulations, market makers used to design innovative products and services which can attract the target customers. What this meant was that the market maker was implicitly forced to design products that suite the market and whosoever came out with the best product (in terms of the returns, service and facilities) used to get majority market share. This always forced competitors to improve their product offerings and had resulted in the customer benefitting immensely. In this scenario customer took decisions on his free will at his own time and his trust on the product and the financial institution.

Demonetization initiative has essentially resulted in a ‘Forced Financial Inclusion’ drive. Everyone who had more than Rs.4000 (of INR 500 and INR 1000 notes) with them were forced to deposit that money in Banks. The quantum of money which came in to the financial system during this demonetization period stood at Rs.12.44 trillion as on 10th December 2016 – which is around 10% of India’s GDP and the final figures will be much more than this. Such a huge influx appears to be a victory for the Modi government as it will be a stimulus for the economy by way of lending to future projects in the country. However it has hampered the free will and trust based financial inclusion process in our country, due to the following reasons:

  1. LEAST FREEDOM OF CHOICE – Market (common man) is forced and hence lost the freedom & time to choose the best product offering
  2. MONOPOLISTIC MARKET MAKERS – Financial institutions will have monopolistic feelings because of this huge influx of capital (at least till the next capital crunch), which is not good for an efficient market and will go against value creation for the common man
  3. RELATIONSHIP WITHOUT TRUST – Trust equation based on which common man used to establish relation with financial institutions is disturbed and also the trust on government.

FREEDOM OF CHOICE – Under normal circumstances, a citizen had the right to keep currency earned with him and take time to choose the right product or investment avenue that gives best returns and that suits his risk appetite. During the 50 day period post demonetization, common man literally was in a panic situation and ended up depositing money in nearby banks irrespective of the returns and other benefits of the product. The freedom of choice of the common man is compromised here and government is not respecting his/her discretion to keep their earnings out of the banking system. As long as the income is declared in income tax returns, government should be good to accept it – right? After all banks are not 100% secure and we have numerous cases of fraud and corruption in banks. What if the bank goes bust due to some irresponsible or unforeseen circumstances? The deposit insurance and credit guarantee corporation (DICGC) in India guarantees only up to a total deposit of Rs.1 Lakh per customer in a bank in case of a mishap (read the RBI notification about DICGC here).

MONOPOLY – Prior to demonetization, banks were competing to improve their technology and product offerings to attract customers and were innovating themselves to attract customers. With this huge influx of money coming in – now they can go slow on attracting deposit customers and this is not advisable for an efficient market. Essentially this resulted in a monopolistic situation for many banks and this will influence their decisions in future. In a monopoly market, transaction costs, fees and other charges will remain high and customer is set to loose. There are several fees charged by banks which are being frowned upon by customers and being in a monopoly situation these are not going to go away soon. Even if government and RBI takes away the restrictions on withdrawals in future, all the bank charges are going to eat into the savings of common man.

LACK OF TRUST – Relationship between financial institutions and common man have always been driven by trust. So the behavior of the Bank officials were also driven by the underlying principle of trust, at least with the depositors as they bring in the low cost funds for Banks. This trust was primarily reinforced by the directives of the RBI and government. Reciprocating with this trust initiatives, the common man mostly used to favour public sector banks and that’s the reason why most of our parents have their accounts with state run banks than the new generation banks. With the government and RBI revoking their promise to honor currency overnight, this trust equation is broken. Even though one can argue this as an action for long term progress, impact in the day to day plans, marriages, funerals, events, tours etc. cannot be neglected. This has also affected the trust on new high denomination currency notes also, as you never know when the government will revoke these notes.

These characteristics are not advisable in a democratic society and financial inclusion should always be free will and trust based rather than forced. Markets should evolve and mature based on merit, value creation and efficiency. Government should aim to create such markets without any disruption in trust. Even though governments are selected basis will of majority in society, it shouldn’t take decisions that thwarts the foundations of the system. Each individual’s will and integrity must be respected as long as it doesn’t disrespect our society’s progress. Citizens must be incentivized basis merit, value creation and efficiency to join the decisions of the government. A forced inclusion ultimately hides the system inefficiencies.

My money – earned by my hard work – should be disposable to me at my will, as long as I am a responsible citizen. Tax is a contribution I pay to the government for keeping such a system running and to keep all its promises & security intact. Let’s keep contributing more to such a society and achieve inclusive progress in a democratic sense.

This is my second blog in connection with demonetization; read the first one on ‘Demonetization in India – An impartial analysis’ here

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