Section – I

Direction for questions 5–8: Read the following passage carefully and answer the questions given at the end.

Passage 2

I have tried to introduce into the discussion a number of attributes of consumer behaviour and motivations, which I believe are important inputs into devising a strategy for commercially viable financial inclusion. These related broadly to the (i) the sources of livelihood of the potential consumer segment for financial inclusion (ii) how they spend their money, particularly on non-regular items (iii) their choices and motivations with respect to saving and (iv) their motivations for borrowing and their ability to access institutional sources of finance for their basic requirements. In discussing each of these sets of issues, I spent some time drawing implications for business strategies by financial service providers. In this section, I will briefly highlight, at the risk of some repetition, what I consider to be the key messages of the lecture.

The first message emerges from the preliminary discussion on the current scenario on financial inclusion, both at the aggregate level and across income categories. The data suggest that even savings accounts, the most basic financial service, have low penetration amongst the lowest income households. I want to emphasize that we are not talking about Below Poverty Line households only; `50,000 per year in 2007, while perhaps not quite middle class, was certainly quite far above the official poverty line. The same concerns about lack of penetration amongst the lowest income group for loans also arise. To reiterate the question that arises from these data patterns: is this because people can’t access banks or other service providers or because they don’t see value in doing so? This question needs to be addressed if an effective inclusion strategy is to be developed.

The second message is that the process of financial inclusion is going to be incomplete and inadequate if it is measured only in terms of new accounts being opened and operated. From the employment and earning patterns, there emerged a sense that better access to various kinds of financial services would help to increase the livelihood potential of a number of occupational categories, which in turn would help reduce the income differentials between these and more regular, salaried jobs. The fact that a huge proportion of the Indian workforce is either self-employed and in the casual labour segment suggests the need for products that will make access to credit easier to the former, while offering opportunities for risk mitigation and consumption smoothing to the latter.

The third message emerges from the analysis of expenditure patterns is the significance of infrequent, but quantitatively significant expenditures like ceremonies and medical costs. Essentially, dealing with these kinds of expenditures requires either low-cost insurance options, supported by a correspondingly low-even poor households to create enough of a buffer to deal with these demands as and when they arise. As has already been pointed out, it is not as though such products and not being offered by domestic financial service providers. It is really a matter of extending them to make them accessible to a very large number of lower income households, with a low and possibly uncertain ability to maintain regular contributions.

The fourth message comes strongly from the motivations to both save and borrow, which, as one might reasonably expect, significantly overlap with each other. It is striking that the need to deal with emergencies, both financial and medical, plays such an important role in both sets of motivations. The latter is, as has been said, amenable to a low-cost, mass insurance scheme, with the attendant service provision. However, the former, which is a theme that recurs through the entire discussion on consumer characteristics, certainly suggests that the need for some kind of income and consumption smoothing product is a significant one in an effective financial inclusion agenda. This, of course, raises broader questions about the role of social safety nets, which offer at least some minimum income security and consumption smoothing. How extensive these mechanisms should be, how much security they should offer and for how long and how they should be financed are fundamental policy questions that go beyond the realm of the financial sector. However, to the extent that risk mitigation is a significant financial need, it must receive the attention of any meaningful financial inclusion strategy, in a way which provides practical answers to all these three questions.

The fifth and final message is actually the point I began the lecture with. It is the critical importance of the principle of commercial viability. Every aspect of a financial inclusion strategy – whether it is the design of products and services or the delivery mechanism needs to be viewed in terms of the business opportunity that it offers and not as a deliverable that has been imposed on the service provider. However, it is also important to emphasize that commercial viability need not necessarily be viewed in terms of immediate cost and profitability calculations. Like in many other products, financial services also offer the prospect of a life-cycle model of marketing. Establishing a relationship with first-time consumers of financial products and services offers the opportunity to leverage this relationship into a wider set of financial transactions as at least some of these consumers move steadily up the income ladder. In fact, in a high growth scenario, a high proportion of such households are likely to move quite quickly from very basic financial services to more and more sophisticated ones. In other words, the commercial viability and profitability of a financial inclusion strategy need not be viewed only from the perspective of immediacy. There is a viable investment dimension to it as well.

5. Which of the following statements is incorrect?

A. In order to succeed, financial inclusion has to be commercially viable.

B. Savings account is one of the basic vehicles for financial inclusion.

C. Savings accounts have low penetration amongst “Below Poverty Line” households only.

D. There is lack of penetration for loans amongst the lowest income group.

Explanatory Note:

Statement A is correct – this is the context of the last para.

Statement B is correct – this is the context of para 5, especially the sentence “However, the former, which suggests that the need . . . . . . . in an effective financial inclusion agenda.”

Statement C is INCORRECT – in para 2, where the author indicates that savings accounts have low penetration amongst the lowest income households and emphasises that this does NOT refer only to BPL households.

Statement D is correct – this is the context of para 2, especially the sentence “The same concerns about lack of penetration amongst the lowest income group for loans also arise.” Choice (C)

6. Which of the following statements is correct?

A. Financial inclusion is exclusively measured in terms of new accounts being opened and operated.

B. There is a felt need for better access to credit products for the self-employed.

C. It is left that financial inclusion could be profitable from day one if a commercially viable strategy is devised.

D. Financial Institutions must deliver social service through financial inclusion.

Explanatory Note:

Statement A is incorrect – this is the converse of the content of the opening sentence of para 3.

Statement B is CORRECT – this the content of the last sentence of para 3, especially the part that states “. . . . . suggests the need for products that will make credit access easier . . . .”.

Statement C is incorrect – this is indicated in the last para, especially the sentence “However, it is also important to emphasise . . . . . . . in terms of immediate cost and profitability calculations.”

Statement D is incorrect – this can be seen in the following sentences of para 5 - “This, of course, raises the broader questions . . . . . . . .go beyond the realm of the financial sector.” Choice (B)

7. Identify the correct statement from the following:

A. Casual labour segment may not require risk mitigation products like insurance as their expenditures on consumption are high relative to their incomes.

B. Income of upto `60,000 per year is the benchmark for official Poverty Line.

C. Financial sector should also look into their role of broadening social safety nets.

D. Risk mitigation of casual labour must receive attention in any meaningful financial inclusion strategy.

Explanatory Note:

Statement A is incorrect – the last sentence of para 3 indicates that casual labour need risk- mitigation products.

Statement B is incorrect – while BPL is mentioned in para 2, the defining limit is not mentioned.

Statement C is incorrect – this can be seen in the following sentences of para 5 - “This, of course, raises the broader questions . . . . . . . . go beyond the realm of the financial sector.”

Statement D is CORRECT – this is the context of para 3 which discusses what would be necessary to render the process of financial inclusion complete and adequate. One of the necessities indicated is “products that will . . . offer opportunities for risk mitigation. . .” with regard to the casual labour segment. Choice (D)

8. Identify the wrong statement from the following:

A. High expenditures on ceremonies and medical costs can be met through a low level Systematic Investment Plan.

B. Given the high growth scenario of the country, only few of the consumers are expected to move up the income ladder.

C. Financial and medical emergencies motivate one to save and borrow.

D. There is an opportunity for banks to cross-sell their products to the bottom of the pyramid.

Explanatory Note:

Statement A is correct – this is the content of the first 2 sentences of para 4.

Statement B is WRONG – the latter half of the last para indicates otherwise, especially the line “In fact, in a high growth scenario a high proportion of households are likely to move (upward) very quickly. . . .”.

Statement C is correct – this is the content of the first 2 sentences of para 5.

Statement D is correct – this is indicated in the latter half of the last para, especially in the line “Establishing a relationship with first-time consumers of financial products . . . . . . move steadily up the income ladder.” Choice (B)