Measuring Financial Inclusion CAFRAL Workshop June 8, 2012 NIBM, Pune
Agenda Definitions Why should we measure FI? Current initiatives in measuring FI Analytical issues in measurement
Definitions
Definitions RBI definition - Financial Inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular at an affordable cost in a fair and transparent manner by mainstream institutional players. Raghuram Rajan Committee - Financial inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products CGAP - Financial Inclusion may be defined as the process of ensuring access to financial services and adequate credit when needed by vulnerable group such as weaker section and low income group at an affordable cost G20- Financial Inclusion refers to a state in which all working age adults have effective access to credit, savings, payment, and insurance from formal service providers. Effective access involves convenient and responsible service delivery, at a cost affordable to the customer and sustainable for the provider, with the result that financially excluded customers use formal financial services rather than existing informal options Jonathan Morduch tests - convenience, reliability, continuity, and a flexible range of services
Definitions Access to full range of financial products and services credit, savings, insurance and payments To all sections of society in general and low-income segments in particular Provided by formal institutions In an affordable, convenient and transparent manner
What is missing in the definitions? Definitions still fairly access/input focussed, what about usage & outcomes? Process of financial inclusion emphasises convenience and flexibility, what about suitability/financial advice/wealth management? Definitions imply a household focus, what about firms? Distinction between firms and households often very thin and unclear
Why should we measure Financial Inclusion?
Motivation A. Policymakers i. What policy interventions and institutional arrangements are working/have the potential for improving access? ii. iii. iv. Understanding efficacy of the financial inclusion spend by Government What are the spatial issues in access to finance and links to overall growth? To benchmark performance relative to other countries/financial systems B. Regulators i. Balancing access across geography and demographics ii. Examining build-up of systemic risk (if any) arising out of specific models/products C. Market participants i. Provides more texture to access challenges (specific characteristics of excluded segments) ii. What are the chief obstacles to access (including direct and indirect costs, regulations, product design)? iii. Opportunities for market players i. 8
Current initiatives in measuring Financial Inclusion
Access to Finance Data in India (Supply Side) RBI Data - Basic Statistical Returns of Scheduled Commercial Banks Focuses mainly on credit and aggregate deposits; keeping population, states, and occupations as variables IRDA handbook on Indian insurance statistics Other Regulator and Bank data Post Office information on savings, money orders etc
Access to Finance Data in India (Demand Side) National Sample Survey Organisation (NSSO) Not disaggregated. Can tell average, but not locale All India Debt and Investment Survey (AIDIS) Conducted every 10 years since 1951, in rural and urban Details all financial transactions, particularly cash borrowings Does survey frequency keep up with changes in the sector?
Access to Finance Data in India (Demand Side and Longitudinal) We really want to know the impact on individuals and HHs this requires experiments or longitudinal data. Yale-CMF-IFMR Tamil Nadu Panel 15year duration. Data collected every 3 yrs on village and household level socio-economic indicators (i) 10,000 randomly selected households across 200 villages & 200 urban units. (ii) Transactions by the sampled households in rural areas will be linked with the census to more precisely characterize social networks and interlinking of contracts Initiatives to be discussed in detail later in the day CMIE Household Panel Invest India Incomes & Savings Survey (IISS), 2007 12
International Experience (Demand Side and Longitudinal) Finscope by FinMark Trust is a representative study of consumers of financial services from 15 countries and aims at Measuring levels of formal and informal financial access and usage Determining landscape of products and services Identifying barriers to access Motivating evidence based dialogue The Finscope Small Business Survey Measures the size and scope of small business sector in 6 countries Segments businesses into market segments Identifies financial product innovation Marks progress with time 13
Access to Finance Data in India (Experimental Approaches) Kshetriya Gramin Financial Services (KGFS) records data of ~200,000 individuals and 115,400 households KGFS branch expansion has been randomised The outcomes of interest are: income, wages, consumption, loan, savings, insurance and other product use; existence and use of informal finance, health, migration and social networks
Analytical Issues
Access vs. Usage: Problem Usage can be measured But group of people who exclude themselves So access wider than usage Voluntarily excluded (Access, no demand) Household prefer cash Enterprises with no investment opportunity Lack of awareness of products Using formal finance indirectly Lack financial literacy Religious, cultural reasons Absence of suitable financial products & services Involuntarily excluded (Demand, no access) Perceived high-risk/poor project quality/poor credit record Discrimination on social, religious, political grounds
Access vs. Usage Even if we have good data on access, need to understand reasons for non-usage Need to understand reasons why usage does not translate into good outcomes Access <> Usage <> Outcomes
Access to Finance Data Measurement innovations Functional Approach to Measuring Supply and Demand: Greg Fischer (LSE) in collaboration CMF-IFMR Detailed questions on how respondents meet financial needs rather than focus on products Helps identify new financial tools which standard surveys cannot capture Providers of finance then surveyed to fully map the financial landscape of a region. Financial Diaries Collins et al. 2009 Track every financial transaction over period of time, including type, value, and reasons for transaction. Advantage: observers can monitor exactly how participants actually manage their finances, instead of a snapshot. Also avoid forcing respondents to fit actions into surveyors pre-specified answers. Difficult to generalize and scale up the results. 18
Thank you