Financial inclusion is defined as the process of ensuring access to financial services and products needed by vulnerable groups (such as weaker sections) and low-income groups at an affordable cost. It offers various financial services and products such as banking services, insurance and equity products.
According to the RBI, as measured by its ‘FI-Index’, financial inclusion improved by 24% between March 2017 and March 2021. The FI-Index (Financial Inclusion Index) incorporates information related to banking, postal services, investments, pension and insurance. The FI-Index gives the highest weightage to the use of various financial services (45%), followed by access (35%) and quality (20%).
The central bank has taken several steps towards financial inclusion such as issuing Kisan Credit Cards (KCC), leveraging technology to increase financial literacy, increasing banking touchpoints in rural areas to enable seamless delivery of credit and other financial services and products.
Why Financial Inclusion?
Through financial inclusion, the government aims to develop a culture of savings and investments among the rural population; this in turn can boost the country’s economy. According to the government, bringing the vulnerable and underprivileged sections of the society under a formal financial system will help protect their financial wealth and other resources during exigencies. Moreover, with access to formal banking credit facilities, the risk of this group being exploited by usurious lenders can be mitigated. Also, the availability of timely credit from formal lending systems will encourage the entrepreneurial spirit of lower income groups, who are otherwise dependent on family, friends and money lenders for loans.
Hence, providing access to formal finance to the unserved, can help lower their dependency on costly informal sources of finance, reduce their vulnerability to economic shocks and create jobs for them.
Reasons of Financial Exclusion
As India is a vast and diverse country, there is a disparity in income and education levels across various sections of the society that leads to varied levels of exposure to financial services and products; hence there are certain sections who lack awareness/ are unaware of various financial products.
As per the National Strategy for Financial Inclusion 2019-24, other factors causing financial exclusion are lack of surplus income, high transaction cost, lack of required documents to avail the services and products as well remoteness of the unserved population.
Financial Inclusion Schemes
The policy makers in India have always been aware of the importance of financial inclusion for economic growth. The government commenced the financial inclusion process way back in the 1950s by nationalising life insurance companies and banks. Subsequently, it undertook a host of initiatives and launched numerous programmes such as the National Strategy for Financial Inclusion (NSFI), in June 2017, that is backed by the Financial Inclusion Advisory Committee (FIAC). The government also introduced the following programmes:
Pradhan Mantri Jan Dhan Yojana (PMJDY)
Launched in 2014, the PMJDY is one of the flagship schemes of the government with an objective to ensure financial inclusion of those individuals who do not have a bank account. The scheme offers various financial services, including basic savings & deposit accounts, insurance, pension, remittance and credit, in an affordable manner. Through this scheme, an individual can open a basic savings bank deposit (BSBD) account in any bank branch or a business correspondent (Bank Mitra) outlet.
Following that, the account holder is offered a ‘RuPay’ debit card and has no prerequisites to maintain any minimum balance in his/her account. The account holder is eligible for other benefits including accidental insurance cover of Rs. 1 lakh (~US$ 1370), which was increased to Rs. 2 lakhs (~US$ 2740) for new accounts that were opened after August 28, 2018; and overdraft facility (OD) up to Rs. 10000 (~US$ 137). In addition, the account holder can avail other schemes such as Atal Pension Yojana (APY), Direct Benefit Transfer (DBT), Micro Units Development & Refinance Agency Bank (MUDRA) and others.
As of September 01, 2021, under the scheme, the government opened accounts for 43.2 crore beneficiaries—with deposits amounting to Rs. 144870.1 crore (~US$ 19.8 billion)—and issued 31.3 crore RuPay cards. Of this, 55.4% account holders were women and ~66% accounts were in rural or semi-urban areas.
Pradhan Mantri Mudra Yojana (PMMY)
Launched in 2015, the scheme aims to provide term loans and working capital loans with a corpus of Rs. 3000 crore (US$ 411 million) to small businesses dealing in manufacturing, trading and services sectors, including the agriculture sector (poultry, beekeeping, dairy, etc.). The scheme offers loans in three categories – Shishu (up to Rs. 50000 or ~US$ 680), Kishore (up to Rs. 5 lakhs or ~US$ 6800) and Tarun (up to Rs. 10 lakhs or ~US$ 13700).
A MUDRA card (RuPay card) is issued by Member Lending Institutions (MLIs) to the borrowers for drawing working capital loan from any ATM or make purchases.
Barring 2020-21, each year the MLIs have been successful in achieving the annual targets set by government. For 2021-22, the target of Rs. 3 lakhs crores (~US$ 41 billion) has been set, of which 20% has already been achieved as of July 30, 2021.
Launched in 2016, the scheme aims to promote entrepreneurship among scheduled castes/scheduled tribes and women by offering bank loans worth between Rs. 10 lakhs (US$ 13700) and Rs. 1 crore (US$ 137000) to at least one SC/ST borrower and one-woman borrower per bank branch of Scheduled Commercial Banks. In this scheme, loans are specifically offered for setting up greenfield enterprises in manufacturing, trading and services sectors.
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
Launched in 2015, the scheme aims to insure the uninsured, especially the underprivileged class, by providing cover for death due to any reasons. The scheme offers a renewable one-year term life cover of Rs. 2 lakhs (US$ 2740) to all subscribing bank holders (aged 18-50). With an annual premium of only Rs. 330 (US$ 4.5), the scheme is administered by LIC and other insurance companies that offer life insurance on similar terms.
As of July 2021, under the scheme, the cumulative enrollments stood at 10.6 crore, including 45.4% women, with the total claim amounting to Rs. 5154.8 crore (US$ 706 million).
Pradhan Mantri Suraksha Bima Yojana (PMSBY)
Launched in 2015, like the PMJJBY scheme, the PMSBY scheme offers a renewable one-year accidental death-cum-disability cover to all subscribing bank holders (aged 18-70). With an annual premium of only Rs. 12 (US$ 0.16), a subscriber is eligible for a claim of Rs. 2 lakhs (US$ 2740) in case of death or complete disability and a claim of Rs. 1 lakh (US$ 1370) in case of partial disability.
This scheme is offered by public sector general insurance companies (PSGICs) and other insurance companies that plan to offer the product on similar terms.
As of July 2021, under PMSBY scheme, cumulative enrollments stood at 24 crores, including 45.8% women, with the total claim amounting to Rs. 972.6 crore (US$ 133 million).
In addition to the above-mentioned schemes, the government has launched Atal Pension Yojana (providing monthly pension to eligible subscribers not covered under any organized pension scheme) and Pradhan Mantri Vaya Vandana Yojana (providing protection to senior citizens from future interest rate shocks due to market uncertainties).
Jan Dhan-Aadhaar-Mobile (JAM)
Under this initiative, by linking Jan Dhan bank accounts with Aadhaar and mobile numbers, the government aimed to create a digital infrastructure that can be leveraged for various purposes including transferring direct benefits, adopting pension schemes, supporting credit flows and promoting digital payments through ‘RuPay’ cards. This initiative has enabled DBT from the government under various schemes to ~8 crore accounts.
Aadhaar-based Biometric Authentication and Digital Payments Solutions
As more and more bank accounts are linked with Aadhaar numbers, executing online financial transactions becomes easy at various banking touchpoints. More than 125 crore digital identities have been generated under Aadhaar, enabling them to authenticate and carry out transactions. Using biometric ID, cost-effective payment solutions have been implemented including Immediate Payment Service (IMPS), RuPay Debit card, Unified Payments Interface (UPI), etc.
Jan Dhan Darshak
Through this ‘Jan Dhan Darshak’ mobile application, the government aims to help citizens locate and view banking touchpoints such as ATMs, bank branches, bank mitras, post offices and common services centres (CSCs). The service is also being used by authorities to identify unbanked locations/villages that do not have any banking touchpoints. The app will act as a guide for citizens to locate financial service touchpoints at a given location in the country. According to the government, the app has mapped >8 lakh financial service touchpoints.
To provide universal financial services, it is important to have a digital infrastructure for various touchpoints including co-operative banks, payment banks and small finance banks, office of local government bodies and common service centres (CSCs). In addition, customising products and services (such as using vernacular languages in mobile apps) to suit the targeted population can help in efficient delivery of basic bouquet of financial services.
Also, the government plans to expand the reach of ‘Centre for Financial Literacy’ (CFL) programme across the country at the block level by March 2024 to boost financial literacy among citizens. Moreover, under the National Strategy for Financial Education 2020-2025 (NSFE), it aims to introduce financial literacy subjects in school curriculums, wherein ~15 school boards have included financial subjects into their courses as of July 2021.
Going forward, the government plans to support and enhance the financial inclusion process through the RBI’s Financial Inclusion Index (FI-Index), which will be published each year going forward. This index will help gauge improvements on a yearly basis and understand gaps in the process.
By targeting bottom of the pyramid, financial inclusion will not only help promote financial stability but also broaden the country’s socioeconomic growth. This will also enable the participating institutions such as banks, NBFCs and insurance companies to improve their customer base and expand into the rural sector. By leveraging technology and support through proper grievance redressal systems, financial inclusion can reduce income inequality and serve the underprivileged and the underserved.
Owing to 24% improvement in financial inclusion (from FY17 to FY21) and sharp focus of the policy makers, the system is likely to become more efficient going forward. Based on this, financial inclusion can be a lethal weapon in combatting poverty as well as spurring economic growth across the country. Therefore, the improvement in financial inclusion is an important step towards a better India, an inclusive India.