7 PM Editorial |Financial Inclusion and Digital India: A Critical Assessment| 11th May 2020

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Financial Inclusion and Digital India: A Critical Assessment

What has happened?

The Reserve Bank of India (RBI) has unveiled a National Strategy for Financial Inclusion 2019-24 in January 2020. It is aimed at providing access to formal financial services in an affordable manner to reduce poverty and create jobs. It also aims to promote financial literacy among customers.

Financial inclusion is one of the cornerstones of a developing economy. Though there has been improvement in digital transactions in the country, there are still issues of dormant accounts, last-mile connectivity of banks and other financial institutions.

This brings to questions of financial inclusion in India. In this article we will discuss the following:

• What is financial inclusion?
• Why there is need for financial inclusion?
• What the steps taken by government to increase financial inclusion?
• The success story
• What are the challenges associated?
• Way forward
• Conclusion

What is financial inclusion?

• According to World Bank, “financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs such as transactions, payments, savings, credit and insurance; and delivered in a responsible and sustainable way”.
• In other words, financial inclusion means connecting marginalized and the underprivileged in the mainstream economy, by providing financial literacy and access to banking and financial services.
• The main intention of providing the access of financial resources to the underprivileged and marginalized is to improve their lives.It has also been observed that financial inclusion has the potential to reduce poverty and create job.

Why there is need for financial inclusion?

• Financial Exclusion: According to a World Bank’s report in 2017, about half of India’s population is financially excluded.
• Financial Illiteracy:Also, according to a survey conducted by Standard & Poor’s Financial Services (S&P), only 24% adults in India are financially literate.
• Critical part of the development process:Successive governments, private institutions and the civil society have altogether helped in increasing the financial-inclusion net in the country since independence. There has been an emphasis to provide last-mile connectivity of banks and other financial institutions.
• Lack of Inclusive Growth: The lack of inclusive growth due to inequalities in economic and social factors, mostly translate into inequalities in terms of opportunities. This further lead to huge disparities in the health and education sectors.

What the steps taken by government to increase financial inclusion?

• Using the institutions like the Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) promote financial inclusion. Both the institutions have promoted financial inclusion by:
• opening bank branches in remote areas,
• issuing Kisan Credit Cards (KCC)
• using information technology to spread awareness and literacy,
• linkage of self-help groups (SHGs) with banks,
• increasing the number of automated teller machines (ATMs)
• increasing the number of business correspondents,
• increasing credit facilities
• increasing insurance covers for the marginalised people
• Pradhan Mantri Jan Dhan Yojana (PMJDY):
• It was launched in 2015 with the objective of providing zero-balance bank accounts to every individual above 10 years of age.
• As per the estimates of Ministry of Finance, in March 2020, the total number of beneficiaries of the programme has been more than 380 million.
• Jan Dhan–Aadhaar–Mobile (JAM) trinty:
• The JAM trinity has a positive impact on the banking sector and financial inclusion.
• The zero-balance Jan Dhan accounts are linked to Aadhaar numbers of the individuals. These are then linked to the Direct Benefit Transfer (DBT) scheme.
• The use of JAM trinity has made significant improvements in targeted and accurate payments. This has helped in removing duplication of entries and bringing down the reliance on cash mode of payments.
• Promotion to Digital Payments:
• Digital India initiative has brought changes in terms of payment facilities available to the underprivileged sections.
• KCC, General credit cards (GCC) and mobile banking facilities have encouraged the poor to participate in the digital ecosystem.
• Digital payments have been made secure by the introduction of Unified Payment Interface (UPI) by RBI.
• The payment system has been made more accessible by offline transaction-enabling platforms, like Unstructured Supplementary Service Data (USSD). USSD makes it possible to use mobile banking services without internet and even on a basic mobile handset.
• The Aadhar-enabled payment system (AEPS) enables an Aadhar enabled bank account (AEBA) to be used at any place and at any time by using micro ATMs.
• Implementation of Goods & Service Tax (GST):
• The small and medium scale enterprises (SMEs) have come under the ambit of financial inclusion by the reforms brought by the GST platform.
• The GST has enabled electronic filling and monitoring system. This helps in pre-filling of information and integration of database. This reduces the compliance burden of assesses and motivates them to be a part of formal financial system.
• Project Financial Literacy: The RBI initiated Project Financial Literacy to promote financial inclusion by engaging business correspondents to provide banking services to the poor.

After discussing the initiatives of government regarding financial inclusion, let us look towards the success story of these initiatives and challenges associated.

The success story:

The success of Digital India and financial inclusion can be measured by the growth in digital transactions, the proportion of the poor and their ability to access banking facilities.

• According to the World Bank’s Global Findex report (2017), 80% Indian adults have a bank account. It is 27 points higher than the 53% estimated in the Findex 2014 report. The Findex 2017 report also estimates that 77% Indian women have bank accounts as against 43% and 26% respectively in 2014 and 2011.
• As per another World Bank report, the total volume of digital transactions in India grew by compound annual growth rate (CAGR) of 30% between 2015 and 2017.
• The mobile banking transactions grew more than five times, from 19.75 million in April 2015 to 106.18 million in April 2017.
• Similarly according to the data of RBI (2020), mobile wallet transactions grew from 11.96 million transactions in April 2015 to 387.6 million transactions which worth Rs 15,408 crore in January 2020.

What are the challenges associated?

• Lack of access to bank accounts:Despite all the initiatives, India is still behind in providing universal access to bank accounts to its citizens. According to the Findex 2017 report, about 190 million adults in India do not have a bank account. This makes India the world’s second largest nation in terms of unbanked population after China.
• Digital divide: The low-income consumers are still left out of the process of financial inclusion because of the digital divide prevalent in India.
• Poors or low-income consumers are unable to afford the technology required to access digital services.
• There is non-availability of suitable financial products,
• There is lack of skills among the stakeholders to use digital services,
• There are infrastructural issues
• Implementation flaws:
• Another challenge to digital financial inclusion arises from the attitude of the stakeholders. For instance Jan Dhan scheme has resulted in the opening of many dormant accounts which never saw actual banking transactions.
• All such activities incur huge operative costs and are only proved to be detrimental to the actual objective.
• Cash dominated and informal economy:
• Indian economy is heavily dominated by cash. The data from RBI reveals that cash circulation has increased in 2018 after demonetisation.
• Also, according to International Labour Organization (ILO), about 81% of the employed persons in India work in the informal sector.
• This combination of informal sector and high dependence on cash mode of transaction poses an obstacle to digital financial inclusion.
• Gender disparities and Socio-economic factors:
• According to the 2017 Global Findex database, 83% of males in India held accounts at a financial institution in 2017 compared to 77% females.
• This is further attributed to socio-economic factors such as the availability of mobile handset and internet data facility are being available to men more than women.

Way forward 

• Target Based Approach:Financial inclusion policies are generally targeted towards specific sectors like MSME, Agriculture or specific regions like Aspirational Districts. It is important to develop sector specific action plans and monitor targets and review the progress.
• Regulatory Framework:There should be a strong regulatory and legal framework aimed at protecting the interests of the customers, promoting fair practices and curbing market manipulations.
• Market Development:The process of market development can be in the form of
• expansion of rural networks and access points;
• allowing preferential prudential rules to encourage lending to rural areas
• setting up special sub-branches in rural areas;
• digitising large-scale payment streams like pension, insurance, and subsidies for rural households etc.
• Strengthening Infrastructure:
• Development of an ecosystem with requisite infrastructure, including credit infrastructure, receipt and payment infrastructure etc., are essential.
• Providing a national level identification, setting up a credit registry database, creation of open and inclusive payment systems are some of the key steps in this direction.

Conclusion

Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over. Access to formal finance can boost job creation, reduce vulnerability to economic shocks and increase investments in human capital. Without adequate access to formal financial services, individuals and firms need to rely on their own limited resources or rely on costly informal sources of finance to meet their financial needs and pursue growth opportunities. At a macro level, greater financial inclusion can support sustainable and inclusive socio-economic growth for all.

India thus needs a multidimensional approach through which existing digital platforms, infrastructure, human resources and policy frameworks are strengthened. More importantly, human resources need to be leveraged by skilling and positively engaging with them to achieve the last-mile connectivity of financial institutions.

Source: Financial Inclusion and Digital India: A Critical Assessment

Mains Practice Question:

 “In a diverse country like India, financial inclusion is a critical part of the development process. However, as per the World Bank, about half of India’s population is financially excluded.” What are the steps taken by the government and the challenges faced in promotion of financial inclusion? (250 words)