Shifting Our Focus From Financial Inclusion To Financial Health For A More Sustainable Future.

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.

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