1. In the post-pandemic
world, the financial resilience of populations continues to be tested
The 2021
Global Findex Report by World Bank shows that 4 out of 5 adults in developing
economies do not have sufficient savings to cover unexpected expenses,
indicating poor financial resilience. While the Covid-19 pandemic is likely to
have influenced this low level of resilience as the crisis led to massive
job losses and labor market disruption, evidence of poor resilience was
present in pre-pandemic years as well.
Various
pre-pandemic studies show that the majority of the population in many emerging
and advanced countries were financially ill-prepared to weather a prolonged
income shock. A study
suggested that more than 50 percent of households in emerging and
advanced economies were not able to sustain basic consumption for more than
three months in the event of income losses. Many
households and firms in emerging economies were already burdened with
unsustainable debt levels prior to the crisis and struggled to service this
debt once the pandemic and associated public health measures led to a sharp
decline in income and business revenue. In the post-pandemic world,
resilience of low-income populations continues to be tested.
2. Financial inclusion
alone does not translate into being financially secure or resilient
Financial
inclusion is undeniably a key enabler of economic growth and development. Rapid
advances in financial inclusion globally have brought over three-quarters of
the world's adult population into the formal financial system. India is a
remarkable global example in its accelerated journey towards building a
financially inclusive society. In India, the PMJDY scheme combined with
India’s digital stack, expansion of the digital payments’ infrastructure, the
regulatory measures to deepen financial inclusion and a responsible approach
towards monitoring the impact of financial inclusion (FI Index by RBI), has
paved the way for an inclusive infrastructure that is bringing previously
underserved low-income populations into the economic and financial mainstream.
But to
reap the full benefits of financial inclusion, policymakers need to look beyond
number of accounts and financial transactions and shift their focus toward
building people’s financial health. In India, the NSFI’s 2019-2024
strategic objective is ‘to make financial services available, accessible, and
affordable to all the citizens in a safe and transparent manner to support
inclusive and resilient multi-stakeholder led growth’.
However,
in reality, practitioners tend to focus solely on access and use of financial
products and services and neglect the ultimate goal of financial inclusion.
This narrow focus on designing new services to aid inclusion has left behind
the primary agenda of improving people’s financial lives. With new and rapid
developments in digital banking and fintech solutions, it is critical to
innovate responsibly with a focus on consumers’ eventual financial outcomes.
It is
through positive financial outcomes that countries can realize several
sustainable development goals (SDGs) including no poverty, good health and
well-being, and economic growth. Putting financial health at the heart of
national inclusion strategies is a good place to start.
3. Financial health is a
more holistic approach for shared prosperity and sustainable development
Financial
health is 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)
The term
financial health is rather nascent in developing markets that aim to integrate
and facilitate financial stability, resilience, and growth, consumer protection
and financial literacy and inclusion, which are also policy priorities for most
governments.
Financial health does not challenge financial inclusion, but rather builds upon its achievements. 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. In this way, financial health connects financial services to broader social-economic concerns and helps advance toward the universal goal of well-being.
The
approach is rooted in consumer welfare and protection and offers ways to
build a stable and resilient financial system as envisaged under the financial
inclusion action plan. Focus on financial health fosters financial service
innovation as well as ensures that the consumers’ wellbeing is not at risk, increasing
the quality and sustainability of financial services, especially in the space
of digital payments and responsible credit.