In order to achieve inclusive development and growth , the expansion of financial services to all sections of society (financial inclusion) is important as global trends have shown. Financial exclusion results in widespread inequality in incomes and earning opportunities.
Countries with low levels of income inequality tend to have lower levels of financial inclusion, while high levels of exclusion are associated with the least equal ones. In Sweden, less than two per cent to adults did not have an account in 2000 whereas in Portugal, about 17 per cent of the adult populations had no account of any kind in 2000. In GINI index of income inequality, both Sweden and Portugal have improved with higher financial inclusion.
Well developed and widely spread financial system extends credit facility to those who do not have adequate finance themselves but have business ideas and zeal to carry entrepreneurial activities resulting in acceleration of growth.
On the contrary, absence of financial penetration and deepening results in absence of debt leverage to micro enterprises and they have to either borrow at very high rates of interest or have to be contented with their own capital. This leads to restricted growth in economic activities.
For micro enterprises, consequences of financial exclusion are many :
(i) susceptibility to cash flow disruptions ;
(ii) inability to face business cycles ;
(iii) absence to benefits from leverage between income and interest outgo ;
(iv) lack of long-term financial security and planning ;
(v) vulnerability during emergencies like hospitalization and medical bills ;
(vi) lack of safety and security of capital; and many more .
The perceived benefits of urban financial inclusion can be sub- divided into two sub categories : macro benefits and micro benefits.
Major macro benefits are :
(i) higher and better productivity ;
(ii) faster growth in economy ;
(iii) reduction In income inequalities;
(iv) widespread development breking the barrier of location specific and centers specific development ;
(v) global admiration and recognition ; reduction in poverty ;
(vi) likely increase in national income ;
(vii) increase in employment and income opportunities ;
(viii) help in more effective distribution of subsidies ;
(ix) helpful in implementation of social security schemes, such as old age pensions, window pensions and so on ;
(x) helpful in shifting to direct distribution of sbusidies by way of crediting bank account of targeted beneficiary rather than indirect distribution of subsidies ;
(xi) helpful in plugging the leakage through distribution channels.
Major micro level benefits are :
(i) smoothing consumption ;
(ii) buffer aginst avoidable expenditure ;
(iii) safety of assets from major disruptions ;
(iv) better incomes ;
(v) rational utilization of saving ;
(vi) freedom from clutches of moneylenders;
(vii) increase in risk taking ability;
(viii) enlarges livelihood opportunities;
(ix) saving of time in collection of periodic social security payments by state and central governments ;
(x) improved self esteem and sense of elevation.