Financial Deepening | Joseph Massey
According to Joseph Massey, capital markets can play a significant role in creating financial inclusion by making available multiple products and services to the masses. This requires conscious efforts to identify the respective target segments and enhanced penetration through financial education, product innovation, diversification, customisation and simplification
Although the economy has made rapid strides in recent years along with higher savings and investment rates, inclusive growth continues to be a challenge. India not only lags behind the developed world but it also has a comparatively lesser degree of financial inclusion as compared to countries like China. Financial inclusion implies ease of access, convenience and low-cost availability of financial products and services to all sections of the population. Faster and more inclusive growth prompts inclusion of diverse economic activities, geographical regions in the financial system.
The role of capital markets is vital for inclusive growth in wealth distribution and making capital available to investors. Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ project needs and risk appetite. Innovation, credit counselling, financial education and proper segment identification constitute the possible strategies to achieve this. A well-developed capital market creates a sustainable low-cost distribution mechanism for distributing multiple financial products and services across the country.
With a long-term growth trajectory, considerable financial deepening, increasing foreign cash-flows and increase in credit, deposits and bank assets as a percentage of GDP post 1990, rapid financial inclusion appears a reality if it can be co-ordinated by various financial institutions and with the application of technology. Lack of institutional co-ordination, competition, technology and financial literacy are cause of lower market penetration. The capital markets also have problems of excessive concentration of trading at member level, company level and also geographically. The market also needs fair amount of development work on the bond market, interest rate futures, SME Segment and in broadbasing the cash market.
Financial deepening also implies a larger focus on the debt and equity markets than physical assets and India lags behind on this front. In 2007-08, savings in physical assets accounted for 52 per cent of household financial assets, though it has come down from 66 per cent in 1994-95.
A Good Business opportunity
The capital markets in India need to cast off the conventional notion that financial inclusion is a part of social responsibility and should realise that it can actually foster profitable business. In Russia, the Russian Post earns 46 per cent of its revenue from financial services, with post offices facilitating domestic and international money transfers for the people without a bank account. Russian Post pays 23 million pensions (60 per cent of total pension payments in Russia) worth US$ 30 billion.
Indian households are among highest savers in the world but less than 1 per cent of the population participates in capital markets. Given a savings rate of 28 per cent (2007-08) and the fact that more than 50 per cent of household savings continue to be in relatively unproductive assets, prospects lie in driving these savings into the financial system and channelising them into productive investments. Through financial inclusion, capital markets can actually generate productive investments.
Complete financial inclusion would need financial literacy and matching technology to enhance accessibility besides adequate competition to cause more substantial marketing and selling. The business correspondent (BC) model can be replicated for increasing financial literacy and thereby increasing direct participation of masses in the financial system.
All financial sector entities should adopt innovative practices and work with certain non-banking bodies (agents) like post offices, commercial outlets, etc., that can provide distribution outlets for financial products. Financial service providers can foster financial literacy on the lines of Gramin Suvidha Kendras (GSK) initiative launched by MCX in association with Post India to provide price information and agri-inputs to the farmers. The postal network can also be used for distribution of financial products and services.
Financial inclusion also demands greater integration of network of banks, exchanges, insurance companies, fund houses and other financial bodies to facilitate and benefit from cross selling. Banks have a larger role to play given 400 million account holders and 80,500 branches with 40 per cent and 24 per cent branches in rural and semi-urban regions respectively. Nearly 55 per cent of the country’s total savings go into bank fixed deposits. Banks can, thus, play a key role in fostering financial inclusion.
The RBI has permitted banks to enter into agreements with mutual funds for marketing and distributing mutual fund products. They are also permitted to offer discretionary portfolio management and investment advisory services. The Indian mutual fund business may constitute only 1 per cent of the global mutual fund sector, but has great potential. Mutual funds play an important role in mobilising the household savings and bringing them to capital markets.
Recently, SEBI has allowed online distribution of mutual funds units through the stock exchanges and retail investors are encouraged to invest in mutual funds. India has more than 200,000 such terminals and allowing investors in over 1,500 towns to invest in the Mutual funds through Stock Exchange terminal will provide accessibility to more investors. The network of brokering companies has spread to semi-urban areas and is now increasing its focus on retail investors. Such cross selling facilities creates enough products and services for each intermediary to have economies of scale and also promotes financial inclusion.
Mobile and internet are likely to trigger faster growth in Indian financial markets. Internet stock trading is popular among retailers. In India, there are 70-80 million internet users and 5.2 million broadband internet connections.
However, internet penetration rate is merely 7 per cent for a billion population as compared to 25 per cent in China and Singapore, and 75 per cent in the United States. This signifies the great potential for internet trading. Currently, mobile telephony serves the people’s need for information access. The penetration of mobiles is more than internet in India, with over 400 million subscribers. In the near future, a mobile trading revolution is likely to generate financial inclusion faster. Multifunctional ATMs can be deployed to provide financial services by banks to a larger set of masses.
Greater financial inclusion is required for growth and development of MSMEs, which contribute heavily to our foreign trade, GDP and in generating large scale employment opportunities. Special focus should be given to the much awaited SME stock exchange, which would help the MSME sector grow by assisting them in raising risk capital and, thereby, contributing to diversification of their sources of finance. It provides an exit route by building bridge between SMEs and the private equity and venture capital. SEBI is working on the final modalities based on which all exchanges will be able to provide SME Exchange segment.
Capital markets can play a significant role in creating financial inclusion by making available multiple financial products and services to the masses. This requires conscious efforts to identify the respective target segments and enhance the penetration through financial education, product innovation, diversification, customisation and simplification. India has sophisticated products and professionals with vast business potential and what is needed is proper financial integration and efforts by capital market players to assume new roles and responsibilities.
Joseph Massey is MD and CEO, MCX Stock Exchange