[Vidhispeaks] The Law Needs to Account for Her

By Shreya Garg and Manvi Khanna

The Reserve Bank of India’s National Financial Inclusion Index crossed the halfway mark in 2021, indicating that a lot has been done for financial inclusion in the country, but nearly as much still remains to be done, especially for women.

This calls for a strong push to further the financial inclusion agenda and make banking systems inclusive for half the population of the country. Financial inclusion of women is of immense importance in achieving gender equality as well as economic independence.

The gender gap figures tell a compelling story: in 2017, the gender gap in account ownership of men and women reduced from 20 per cent to 6 per cent, however, 55 percent women still do not use their accounts. Further, the share of women in bank credit was only 7 per cent compared to 30 per cent share of men, with the rejection rate for loans to women-owned businesses being 2.5 times higher than that for men.

The working paper by Vidhi titled, ‘The Law Needs to Account for Her: Reforms to make finance inclusive’ suggests legal and policy interventions to address some of the issues which directly impact financial inclusion of women in India.

A. RBI and Ministry of MSME

The working paper discusses three legal reforms that can potentially lead to women enterprises and retail women customers access financial services in a more inclusive manner.

First, emphasising a lack of a uniform and suitable definition of women-owned enterprises in the law, the working paper recommends the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) to be amended to add a criterion classifying MSMEs based on whether they are owned/led by women. It is not the case that ‘women-owned enterprises’ has not been defined at all in the Indian context, but that each stakeholder understands the term differently owing to a multiplicity of definitions, which in turn leads to disparities in access to benefits and inaccurate gender-disaggregated data.

To bring about uniformity and give a distinct identity to such enterprises, it becomes essential to define them in the law. The working paper discusses several use cases of such a definition:

(i) earmarking of credit to women-led enterprises by banks under RBI’s Priority Sector Lending Directions 2021 under the micro enterprise category, as well as under RBI’s 2000 Directions on financial inclusion of women which set aside 5% net bank credit for women by public sector banks;

(ii) better targeting of women-centric schemes, initiatives, and products;

(iii) collection of accurate gender-disaggregated data by adding women enterprises as a data point in the Basic Statistical Returns and Monitoring Progress of Financial Inclusion Returns, which are the main source of collecting data from Scheduled Commercial Banks; and

(iv) a consolidated digital platform for such enterprises - all of which contribute towards creating an enabling ecosystem for women entrepreneurs and bringing them to the forefront.

Second, the working paper identifies the need for increasing the engagement of female business correspondents (BCs) in an otherwise male-dominated profession (female BCs comprise only 10 per cent of the BC system). BCs play a pivotal role in furthering the financial inclusion agenda in the country from the time of their conceptualization by RBI in the year 2006.

Their role is of immense importance, especially for women customers for whom they solve mobility, time and hesitancy barriers that they face in accessing financial products and services. Female BCs are better positioned to serve and engage with underbanked women who feel more comfortable in reaching out and trusting them, and female BCs are more likely to have a larger women customer base.

However, a host of issues that can be attributed to socio-economic factors such as onerous minimum qualification criteria, mobility and safety challenges, lack of equipment support and lack of life and health insurance coverage impede their enhanced representation.

The working paper suggests affirmative actions that the RBI may take in terms of laying out minimum support measures to be extended to such female BCs by banks through a circular, to make this profession more viable and bolster their engagement in the BC network.

Third, the working paper suggests that digital banks (DBs) which are internet-only banks to have a financial inclusion and gender lens. Considering that these would be a new class of banks and the framework for them is yet to be put in place by RBI, it is suggested that the proposed framework from the very beginning pivots them to better serve the goals of financial inclusion.

This may be done by clarifying the objective and target segments for DBs to specifically emphasize on women enterprises and retail women customers. Further, the working paper necessitates the need for physical presence of such DBs given that in developing countries, physical networks play a critical role in enabling customers to transform cash into e-money. Tyme Bank is one such DB in South Africa that has an active customer base of rural and low-income women and is a successful example of how physical presence within the DB infrastructure (through grocery stores as cash in cash out points) along with low banking fees can prove to be a game-changer in serving the needs of underserved women clients.

The next part of the working paper brings to the spotlight the extant gaps in the financial products and services offered by financial institutions and fintech companies to its women customers. There appears to be a gaping mismatch between the available financial products and the needs of women customers, that are coupled with insufficient steps taken towards reducing transaction costs, simplifying complex documentation procedures and offering gender specific non financial services.

For instance, while women running a business would prefer simpler products bundled with relevant non-financial services such as legal and tax assistance, they are offered quite run-of-the-mill non-financial services (cashback, locker and shopping discounts) which are not gender-specific. Tarjeta Emprendedora, a bank in the Dominican Republic offers technical assistance in areas of accounting, taxation law and labour law attached to its women- entrepreneur specific credit card.

The working paper provides similar interesting insights of international women-centric products that use innovative collateral (using only gender disaggregated data for algorithms conducting credit risk assessment), simpler interfaces and understand the non-homogenous needs of women customers as a segment. These insights can help financial service providers to better serve the needs of women customers in the Indian context.

The business case for financial institutions to serve women customers is strong as they default less, and have lesser non-perfroming assets, make timely repayments, are better depositors, are more profitable as they are more loyal, and are amenable to higher cross sales and they spend more on family’s health and education needs leading to better economic growth.

Hence, adding a gender lens to existing laws and financial products, to bring them to the forefront, is a must. Financial inclusion of women is a long road to cover and a small step in this journey has been ideated in this working paper.

The country has made progress over the years to deepen the financial services, but we are still struggling with answers to basic questions - how many women use their bank accounts or how many women have been comfortable accessing a loan product?

Shreya Garg is Senior Resident Fellow and Lead, and Manvi Khanna is a Research Fellow at the Law, Finance and Development team, both at the Vidhi Centre for Legal Policy, New Delhi.

The working paper can be accessed by clicking here.

Vidhispeaks is a fortnightly column on law and policy curated by Vidhi. The views expressed are of the fellow, and do not reflect the views of Vidhi or Bar & Bench.