[Answered] Discuss various challenges and significance of financial inclusion for Indian economy? Also mention steps taken by Indian government towards financial inclusion.

Even after 70 years of independence, a large section of Indian population still remain unbanked. This malaise has led generation of financial instability and pauperism among the lower income group who do not have access to financial products and services. However, in the recent years the government and Reserve Bank of India has been pushing the concept and idea of financial inclusion. Financial inclusion is must for overall growth of the nation.

Significance of financial inclusion for India:

1. Reduce Poverty: Financial inclusion means greater access to financial services and an increase in savings. This would help in decreasing income inequality & poverty and would lead to increase in employment levels.
2. Growth: It encourages the habit to save, thus enhancing capital formation in the country and giving it an economic boost. Also, the availability of sufficient and transparent credit from formal banking institutions will promote the entrepreneurial spirit among the people, leading to an increase in productivity and prosperity in rural areas.
3. Service delivery: Direct cash transfers to beneficiary bank accounts rather than physical cash payments against subsidies have become possible. Thus funds actually reach the targeted beneficiaries instead of being siphoned off along the way.
4. Banks’ efficiency: Banks which are operating in a financial inclusion sector could experience higher operating efficiency in financial intermediation.

What are the challenges to financial inclusion in India?

1. Illiteracy – In India, where nearly 1/4th of the population is illiterate and below the poverty line. Thus ensuring financial inclusion is a challenge.
2. Low income and the inability to provide collateral security.
3. Lack of enough bank branches in rural areas continues to be the roadblock to financial inclusion.
4. More reliance on informal lending.
5. Difficulty in understanding different product offerings, financial terms, and conditions.
6. A lot of hidden bank charges have demotivated poor persons from availing financial services.
7. Low-income groups don’t see banks as welcoming and often believe they are not for them.
8. Lack of credible, low-cost and high-quality financial advice.
9. Most women are being excluded from the formal financial system.
10. Disabled people find it difficult to access banks.
11. The rising level of Non-Performing Assets (NPAs) of banks due to the large corporates makes it difficult to improve financial inclusion situation in India.

What are the initiatives taken by the government to improve financial inclusion?

1. Banking initiatives:
   • Regional Rural Banks (RRBs): On the basis of Narasimham Working Group 1975, RRBs were established to serve banking needs of rural population.
   • Priority Sector Lending: is an important role given by the RBI to the banks for providing a portion of the bank loans to few specific sectors such as agriculture or small scale industries.
   • Business correspondents: RBI permitted banks to engage business correspondents/facilitators for providing door-step delivery of financial and banking services.
   • No-frills accounts: No-frills accounts means the bank accounts which does not require a minimum balance (or low sometimes). This means more accessibility to vast sections of the population.
   • KYC relaxation: Know Your Customer (KYC) requirements for opening bank accounts were relaxed for small accounts in August 2005. The opening of bank accounts became even easier with Aadhaar introduction.
   • Jan Dhan, Aadhaar and Mobile (JAM): It is a three-part strategy based on using digital technologies- Jan Dhan (banking), Aadhaar (Biometric Identity) and Mobile (transactions).
2. Other initiatives: Establishment of payment banks and small finance banks.
   • Establishment of MUDRA bank to refinance micro-finance institutions to lend to non-formal sectors such as MSMEs through PM Mudra Yojana.
   • Financial literacy centres were launched by commercial banks at the request of the RBI.
   • Financial inclusion of women through Aadhaar implementation.
   • Unified Payments Interface (UPI) platform built by the National Payments Corporation of India (NPCI).
   • National Centre for Financial Education was established in 2017 to implement the National Strategy for Financial Education.
   • Self-Help Group (SHG) – Bank Linkage Programme (SBLP) was launched by NABARD to provide door-step banking to the poor with the help of SHGs.
3. Social security Initiatives:
   • PM Suraksha Bima Yojana (PMSBY): Accidental death cum disability insurance, renewable 1 year, for 18-70 age group.
   • Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): Life insurance, renewable 1 year, for 18-50 age group.
   • Atal Pension Yojana: Focus on unorganised sector.
   • Pradhan Mantri Jan Dhan Yojana: PMJDY has ensured universal access to bank account and India now has 180 billion accounts. However, 48% of those accounts haven’t seen any transaction in the last one year.

Merely opening an account does not make sure that the account is used. Instead, the following things can be done for the proper utilisation of accounts. Financial literacy programmes should be undertaken and backed by products that address the real needs of consumers, with the support to use the product. People have to be imparted an ability to understand and execute matters of personal finance such as basic numeracy and literacy, financial awareness, knowledge and skills, attitude and behaviours needed to make sound financial decisions, budgeting, investing and risk diversification.