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“When an economy is generating jobs, income, markets and demand, people do not need to be forced into the financial system. They enter naturally… because they see opportunity, they invest, because the future looks bigger than the present,” he said at the Global Inclusive Finance Summit here.
“No financial institution can substitute for what economic development can provide. Finance is a complement to development, not a replacement for it.” Where livelihoods are stable, inclusion becomes fragile and where livelihoods are expanding, inclusion becomes a self-reinforcing process, he said.
Therefore, when finance is properly linked with real economic activity, it can become a powerful catalyst for growth, he said.
Noting that inclusive finance succeeds when it strengthens real economic activity and not when it becomes an end in itself, he said that under PM Swanidhi, street vendors, who were hit the hardest during the pandemic, used access to working capital not only to survive but to expand, invest in basic assets, improve margins and build more sustainable businesses.
This, he said, is what inclusion should mean – enabling people to move out of weakness and move from survival trade to more productive work.
He also said banks would have to include people graduating from the government’s credit support schemes in their core portfolios, and investors in inclusive finance institutions would have to accept lower financial returns in exchange for social returns.
“We count the number of bank accounts, the number of loans disbursed and the number of active mobile wallets. But inclusion, properly understood, is not an estimate; it is a journey. The real question is not whether people have entered the financial system, but whether finance is helping them move towards economic freedom,” Nageswaran said.
He also said that financial inclusion which leads to indiscriminate lending defeats its purpose, resulting in stress and over-indebtedness instead of empowerment.
The Chief Economic Advisor said that inclusive finance institutions are intermediaries for the economically weaker sections, and real impact investing means clearly valuing social returns and accepting lower financial returns in return.
He also stressed that mainstream banks should actively include new proven borrowers, such as PM Swanidhi beneficiaries, into their core portfolio, offering regular loans, insurance and working capital lines, and not just as scheme beneficiaries.
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The scheme acts as a bridge between the formal and informal sectors by creating transaction records for millions of people who were previously invisible to the formal banking system.