Financial Inclusion

What is Financial Inclusion?

• Financial inclusion refers to the accessibility and availability of financial services and products to all individuals and businesses, particularly those who are marginalized or underserved. 

Financial inclusion in India: Present status

• As per RBI’s Financial Inclusion Index (FY22), FI stands at 56.4 as against 53.9 for FY21.

• According to working paper by the IMF, India’s household debt is a little less than 10% of the GDP compared to 150% in the US and 44% in China.

Need of Financial Inclusion

• Poverty reduction, Economic growth and development, Social empowerment, Financial stability and resilience, Government benefits and social welfare, Innovation and technological advancement.

Challenges to Financial Inclusion

• Limited access: Many people lack physical access to financial services due to inadequate infrastructure. According to World Bank report, about 190 million adults in India do not have a bank account, making India the world’s second largest nation in terms of unbanked population after China.

• Low financial literacy: Lack of basic financial knowledge hinders individuals' ability to make informed decisions. According to a survey, more than 75% of Indian adults do not adequately understand basic financial concepts & more than 80% women are financially illiterate .

• High costs: Traditional banking services are expensive and unaffordable for many low-income individuals.
• McKinsey estimates that Indians lose more than US$ 2 billion a year in forgone income simply because of the time it takes travelling to and from a bank.

• Identification requirements: Lack of proper documentation makes it difficult to access formal financial services.

• Limited credit availability Insufficient collateral and credit history restrict access to loans.

• Technological barriers: Limited technology access and digital literacy impede financial inclusion.

Government Initiatives 

JAM Trinity 

• The combination of Aadhaar, PMJDY (Pradhan Mantri Jan Dhan Yojana), and mobile communication has transformed access to government services and financial inclusion.  
• As per the RBI’s Financial Inclusion Index, JAM trinity – Jan Dhan, Aadhaar, and Mobile – have enabled the Indian government to improve financial inclusion from 43.4 in 2017 to 56.4 in 2022.
• As of August 2022, out of a total of 46.25 crore PMJDY accounts have been opened.
• About 5.4 crore PMJDY account holders receive direct benefit transfer (DBT) from the government.

• e-RUPI:  Person and purpose-specific digital payment solution; it is a QR code or SMS string-based e-voucher that is sent to the beneficiary’s cell phone. Users of this one-time payment mechanism will be able to redeem the voucher at the service provider without the usage of a card, digital payments app, or internet banking access.

Promotion of Financial Service in Rural and Semi-Rural areas

• Opening Bank Branches: The RBI and NABARD have facilitated the establishment of bank branches in remote areas, ensuring accessibility to banking services for rural communities.

• Kisan Credit Cards (KCC): The issuance of Kisan Credit Cards has been instrumental in providing farmers with a convenient and affordable source of credit.

• Business Correspondents Model to extend banking services to areas were setting up a brick-and-mortar branch may not be feasible.

• Jan Dhan Darshak: To help citizens locate and view banking touchpoints such as ATMs, bank branches, bank mitras, post offices and common services centres (CSCs).

Promoting Financial Literacy

• Project Financial Literacy: The project educates students, women, rural and urban poor, defence personnel, and seniors about the central bank and general banking concepts.

• Pocket Money: SEBI financial literacy programme for schoolchildren. The programme teaches students about money, saving, investing, and financial planning.

Digital Financial Inclusion:

• It involves the deployment of cost-saving digital means to reach currently financially excluded and underserved populations with a range of formal financial services suited to their needs that are responsibly delivered at a cost affordable to customers and sustainable for providers.

Issues and Challenges: 

The World Bank has observed following risks with Digital Financial inclusion:

• Novelty risks for customers due to their lack of familiarity. 
• Agent-related risks due to the new providers offering services are not subject to the consumer protection provisions.
• Digital technology-related risks can cause disrupted service and loss of data, including payment instructions.
• Issues of Cyber security and financial frauds.
• Regulatory issues like anti-money laundering and countering financing of terrorism (AML/CFT) rules, regulation of e-money, consumer protection.

Way Forward:

• Need to focus on enhancing digital connectivity and infrastructure particularly in remote and rural areas. 
• Appropriate regulations and procedures regarding digital operations.
• Cyber security through adoption of appropriate technologies eg. Tokenization cards in India 
• Providing digital skills and training program and awareness creation.

Conclusion:  Inclusive growth is crucial for equitable development, requiring measures to address inequality, promote social inclusion, empower marginalized communities, and embrace sustainable practices. By fostering an inclusive society, nations can unlock the full potential of their citizens and build a more prosperous and sustainable future for all.