“I dream of a digital India where mobile & e-banking ensures Financial Inclusion” – Prime Minister Shri Narendra Modi
Contents
What is financial inclusion?
Financial inclusion is the delivery of financial services at affordable costs to all sections of society (including the disadvantaged and low-income segments).
The term ‘Financial’ includes all types of financial services, including savings, payments and credit from all types of formal financial institutions.
It strives to address and bring solutions to the constraints that exclude people from participating in the financial sector.
United Nations has defined Financial Inclusion as follows:
1. Access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance
2. Sound and safe institutions governed by clear regulation and industry performance standards.
3. Financial and institutional sustainability, to ensure continuity and certainty of investment
4. Competition to ensure choice and affordability for clients.
Need for Financial Inclusion in India
1. Banking for the unbanked: Financial inclusion would ensure universal access to bank accounts, which are a gateway to all financial services.
2. Digital payment services: As per NITI Aayog’s Strategy report, the percentage of the population using mobile money services in India(in 2016) was only 1 per cent, compared to Bangladesh (40 per cent), Pakistan (9 per cent), Kenya (81 per cent). Thus, financial inclusion would facilitate providing access to digital payment services and increasing their penetration.
3. Insurance and social security: Financial inclusion would ensure universal coverage of insurance for life, accidents, etc., and of pensions and other retirement planning services.
4. Asset diversification: It would allow diversification of the asset portfolio of households through increased participation in capital markets.
5. Access to credit: India has considerable ground to cover in terms of credit access. As per a NITI Aayog report, the number of loan accounts per 1000 adults was 154 in India(in 2016). In comparison, the number of loan accounts per 1,000 adults was 88 in Bangladesh, 26 in Pakistan, 417 in South Africa, and 231 in Kenya. Thus, financial inclusion would ensure better access to credit at a reasonable cost for those presently excluded(such as small and marginal farmers).
Challenges to Financial Inclusion
1. Lack of financial literacy: A large proportion of the population(such as : rural households, low income households and small informal businesses) depend on the informal sources of credit due to a lack of financial literacy among them.
2. High cost of transaction: Traditional banking models consisting of brick-and-mortar bank branches in remote areas add to the operational cost of the banks. This has acted as a disincentive for the banks to move to remote
regions.
3. Lack of credit information: Lack of information to determine the credit-worthiness of low-income households and informal businesses with formal creditors acts as a constraint while lending. This results in high cost of credit.
4. Low and irregular income: Income level is one of the prominent factors that hinder the underprivileged from availing services from banks. The majority of the people’s income level in the rural area is low and irregular too. A major portion of people is in seasonal employment. Hence, income level decides people’s savings and investment avenues.
5. Regulatory Cholesterol: At present, there are a number of authorities ( RBI, SIDBI, NABARD etc.)that play a role in financial inclusion. This has led to multiplicity of regulations and coordination issues between them. Such a situation is also referred to as ‘regulatory cholesterol’.
6. Large amount of NPAs: Weak balance sheets of banks and the rising NPAs have made the banks reluctant and cautious in lending to customers such as farmers, small businesses and thin file clients( Clients with zero or insignificant credit history).
7. Technological Issues: Frequent machine breakdowns, lack of internet connectivity and problems with hand-held devices have continued to deter the financial inclusion of unserved and under-served areas.
8. High Cost: Nowadays banks are operating for profit in a competitive environment. They levy charges for different transactions like minimum balance requirements, charges for usage of ATM services, processing fees etc.
Government Initiatives for Financial Inclusion in the past
1. Nationalization of Banks(1969 &1980): 20 privately controlled banks were nationalized in 2 phases. The objective of the move was to enable the banks to extend their reach to serve the needs of poor and marginalized sections.
2. Priority Sector Lending: Lending by a commercial bank for certain sectors which are identified as “priority sector” by the Reserve Bank of India is called priority sector lending. It ensures that priority sectors, such as agriculture, MSMEs etc., receive credit from formal channels. It provided an opportunity for the poor and the underprivileged to access credit.
3. Lead Bank Scheme: A lead bank is identified to act as a leader in a particular district for coordinating the efforts of all credit institutions. It aims to increase the flow of credit to agriculture, small-scale industries and other economic activities included in the priority sector in the rural and semi-urban areas.
4. Regional rural banks: It was established with the objective of reaching the target groups in rural areas. It helped in developing a professional culture in extending credit to rural areas.
5. Service Area Approach(1989): It was introduced for the planned and orderly development of rural and semi-urban areas through the allotment of identified villages to a branch for the financial inclusion of people in the villages.
6. Self Help Groups-Bank Linkage Programme( SHG-BLP ) 1992: The programme mainstreamed self-help groups by providing credit without collateral to the poor. It brought in over 10 million poor women into the banking fold
Recent Initiatives
- Jan Dhan-Aadhar-Mobile (JAM) Trinity:The combination of Aadhaar, PMJDY, and an increase in mobile communication has transformed how citizens access government services. According to estimates in August 2021, the total number of Jan Dhan scheme beneficiaries was more than 430 million.
- Financial services expansion in rural and semi-urban areas
- Kisan Credit Cards (KCC) are being issued.
- Self-help groups (SHGs) are linked with banks.
- Increasing the number of ATMs.
- Businesscorrespondent model of banking.
- Digital Payments Promotion
- In comparison to the past, digital payments have become more secure thanks to NPCI’s strengthening of the Unified Payment Interface (UPI).
- The Aadhar-enabled payment system (AEPS) allows an Aadhar-enabled bank account (AEBA) to be used at any location and at any time through the use of micro ATMs.
- The payment system has become more accessible as a result of offline transaction-enabling platforms such as Unstructured Supplementary Service Data (USSD), which allows users to use mobile banking services without the need for an internet connection, even on a basic mobile handset.
- Improving Financial Literacy
- The Reserve Bank of India has launched a project called “Project Financial Literacy.” The project’s goal is to disseminate information about the central bank and general banking concepts to a variety of target groups, including school and college children, women, the rural and urban poor, military personnel, and senior citizens.
- ‘Pocket Money’ is the flagship programme of the Securities and Exchange Board of India (SEBI) and the National Institute of Securities Markets (NISM) aimed at increasing financial literacy among school students. The goal is to teach students about the value of money and the importance of saving, investing, and financial planning.
Way Forward
1. Product: Diversified products and services with adequate flexibility, and continuous availability may be developed to serve the rural masses. It would have the greatest impact on reducing poverty and empowering the rural masses.
2. Processes: Business processes needs to be realigned to help banks reach the deprived and vulnerable population and provide them with hassle-free doorstep service.
3. Partnership: The bank-nonbank relationship [SHGs, MFIs etc] can be enhanced to ease the accessibility and availability of financial services.
4. Protection: Adequate safeguards are needed to be put in place to protect the receivers and providers of financial services.
5. Profitability: Proper delivery models are needed to ensure that the rural finance service providers function profitably on a sustained basis.
6. Productivity: The focus of the financial inclusion initiatives should be on maximizing productivity by adopting a ‘CREDIT-PLUS APPROACH’. [The Credit-plus approach integrates adequate and timely credit into larger developmental processes such as community organizing, leadership training, entrepreneurship etc.]
7. People: The rural branch staff should be adequately equipped to meet the needs of driving the process of financial inclusion in terms of knowledge, skills and attitude.
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