Financial health is a more holistic approach for shared
prosperity and sustainable development for India
Financial
health emerges as an approach that focuses on ‘outcomes’ and seeks to
understand the extent to which a person or family can smoothly manage their
current financial obligations today and in the future. These outcomes are
deeply rooted in consumers’ present and future lives and include the ability
and agency to manage day-to-day expenses (financial security), cope with and
bounce back from economic shocks (financial resilience), feel in control over
one’s finances (financial control), and meet one’s financial goals and pursue
choices (financial freedom).
1. Financial health does not challenge financial inclusion,
rather builds upon its achievements
The term
financial health is rather nascent in developing markets. It is neither
disruptive nor contradictory to the current work on financial inclusion and
financial literacy. On the contrary, financial health aligns with and takes a
holistic approach to integrating and facilitating financial stability,
resilience, and growth, consumer protection and financial literacy and
inclusion, which are also policy priorities for most governments.
In fact, the
concept of financial stability and resilience has strong commonalities with
financial health, except that financial health takes a microscopic view at the
level of individuals and households.
By
measuring, understanding and addressing individuals’ financial health, it
signals financial stability at a much more granular level and in an acute
manner, helping both crisis prevention and root cause detection.
2. Financial health serves as an intermediate linkage between
financial inclusion and the SDGs
Various
studies[i]
suggest that the COVID-19 pandemic has pushed millions of Indians back into
poverty. Strengthening individual financial resilience can help ensure that
low-income people do not fall back into poverty due to economic shocks and
achieve improved mental health, work productivity, social relationships, and
consequently overall wellbeing.
The
financial health approach intersects with livelihood, healthcare, food
security, education and climate change just to name a few. It connects
financial services to broader social-economic concerns and debates and helps
advance toward the universal goal of well-being.
For
instance, it allows examination of smallholder farmers’ resilience when exposed
to the disaster caused by climate change, ageing population’s access to
affordable convenient healthcare and women’s capabilities for upscaling
opportunities.
Financial
health approach is inherently consumer-centric and facilitates the policy
debate around social safety nets and consumer protection for vulnerable groups
such as elderly, informal sector workers, and small businesses.
3. Financial health is rooted in consumer’s welfare and
protection and offers ways to build a stable and resilient financial system
Financial
consumer protection is a critical component of increased financial inclusion
especially when it comes to fintech and digital finance.
Indian
financial market regulators have taken important steps to lay the groundwork
for a strengthened financial consumer protection framework covering key aspects
of consumer protection, such as customer rights, service quality, and grievance
redressal. However, experiences from previous financial crises suggest that a
set of voluntary consumer protection principles alone are always not sufficient
for providers to act in consumers’ interest.
Particularly
in times when financial providers operate invisibly and products such as
peer-to-peer lending and Buy Now Pay Later (BNPL) can both benefit and harm
people financially. As a result, global action on customer protection, such as
the proposed Consumer
Duty
in the UK, is aligning towards putting a significant burden on finance
providers to deliver good customer outcomes.
The
financial health approach is not a panacea, but it does assist in closing parts
of the gaps in consumer protection. Measuring the end customer outcome applies
to both traditional and digital financial service providers in the same
framework, serves as a benchmark to evaluate whether consumer protection
measures are effective, tracks the possible fluctuation for further supervision
and inherently takes a cross-product view.
And as
the Reserve Bank of India resonates that building a stable and resilient
financial system is a collective effort of regulators, financial service
providers, and financial consumers. The contribution of financial consumers
towards a stable and resilient financial system can only be ensured by managing
individual financial health.
4. Financial health approach provides a strategic pathway to
build consumer resilience
The
customer-centricity nature of financial health ensures that private sector
practitioners foster customer resilience by identifying customers’ needs before
jumping into a certain pre-assumed product design and delivery method. This
approach will foster financial service innovation as well as ensure that the
consumers’ wellbeing is not at risk, increasing the quality and sustainability
of financial services.
In fact,
aligning business strategy with the financial health of customers can result in
better financial and social returns for financial service providers and thereby
contributing to SDG7[ii].
In a
nutshell, the people-centered financial health approach will be a critical tool
in leading the financial sector to achieve the milestones of wellbeing, shared
prosperity, and sustainable development.
Why is India suited to spearhead the global agenda on
Financial Health?
Despite
the increasing number of studies, the concept of financial health is rather
nascent in the developing country context and has not yet influenced financial
sector policy dialogue in a big way, though this is beginning to change in
countries including Brazil, Kenya, Mexico, Peru and the Philippines.
India
today stands out with its financial inclusion infrastructure as a public good
that is accelerating the development of services leveraging digitally enabled
finance and providing the right balance of policy support, regulatory framework
and innovation infrastructure. Due to the remarkable innovations, India has
witnessed a significant increase in account ownership, from nearly 43 percent
in 2014 to almost 80 percent in 2021 (Global Findex, 2021).
1. India stack has
accelerated the inclusion journey that is essential for social security
benefits to reach the poor
This
inclusion journey has been further advanced by India stack that has combined
the digital payments setup and Aadhaar’s identity and authentication know-how
to accelerate the process of opening new accounts and enabling mobile
connectivity. This has allowed direct benefit transfers (DBT) by the government
into people’s bank accounts creating ease of access and increasing efficiency,
serving as an example worldwide. The impact of digital payments in DBT can be
discerned from the fact that Rs 5.5 Lakh Crore was transferred digitally across
319 government schemes spread over 54 ministries during 2018-2020
2. A robust digital
public infrastructure in collaboration with the private sector has created new
opportunities for expanding livelihoods in the country
With the
expansion of the digital payments infrastructure aided by policy actions such
as the Payment Infrastructure Development Fund (PIDF), citizens can now make
payments with just their biometric Aadhaar identifier making domestic
remittances effortless especially for the low-income segments. In Financial
Year 2022 alone, UPI processed more than 46 billion transactions amounting to
over Rs 84.17 trillion indicating an upward trajectory mirroring the recovery
in the broader economy.
At the
same time, the digital infrastructure creates the opportunity to digitize
transactions for small business operators allowing them to access loans using
their transaction history, expanding access to not only credit but also other
financial services.
3. Regulatory measures to
deepen financial inclusion add much needed value for small businesses, marginal
and small farmers, and unorganized sector workers
A
differentiated banking license for Small Finance Banks (SFBs) since 2015
provides a savings channel and supply of credit to otherwise underserved
low-income populations of the country through high-technology low-cost
operations. Taking this forward, The National Strategy for Financial Inclusion
2019-2024 (NSFI) and National Strategy for Financial Education 2020-2025 (NSFE)
provide a future road map for advancing financial inclusion and financial literacy
to achieve financial wellbeing, prosperity and sustainable development.
4. Measurement and
monitoring of impact on policy and consumer outcomes
At the
institutional level, the Financial Access Survey (FAS) of the International
Monetary Fund (IMF) collects annual time series data on access and use of basic
financial services around the world. The World Bank conducts the Global
Financial Index Survey every 3 years to understand the way people are using
financial services and their financial security to provide insight to policy
and services on enhancing people’s financial outcomes. At the national level,
in India, RBI has constructed a financial inclusion index which quantifies the
extent of financial inclusion and is responsive to availability, ease of
access, the extent of usage, inequality and deficiency in services, the extent
of financial literacy and consumer protection in the formal financial system;
and captures the expansion of banking, investments, insurance, postal as well
as the pension sector[i]
Findings
from the FI index recognize the need to go beyond the access to financial
services and examine deeper aspects such as regularity of income, design of
relevant financial products, enhancing financial knowledge and addressing
infrastructural gaps that inhibit improved financial behaviors. Such measures
indicate the presence of data-led systems approach toward financial security
and protection of its citizens that paves the way forward for evidence-based
policy formulation.
Backed by its robust
digital infrastructure readiness and policy framework, India is a leading
global voice on financial inclusion and financial literacy, and is extremely
well-positioned to lead further in the global financial health agenda.
The
existing financial inclusion infrastructure sets a great foundation to reach
mass customers, experiment with both objective and subjective measurement
methodologies, and design innovation interventions to identify financial health
best practices for global, and especially south-south learnings.
[3] Reserve Bank of India - RBI Bulletin
