Financial Inclusion in India – an overview

Context: Over the past few years, efforts to drive financial inclusion in India have delivered mixed results. Introduction: Financial inclusions in India result into a dramatic change like access to bank accounts has increased, driven by a strong policy and regulatory push. What is Financial Inclusion?

• Financial inclusion is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable.
• Financial refers to 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.

The United Nations defines the goals of financial inclusion as follows:

• 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.
• Sound and safe institutions governed by clear regulation and industry performance standards
• financial and institutional sustainability, to ensure continuity and certainty of investment; an
• Competition to ensure choice and affordability for clients.

In partnership with the National Bank for Agriculture and Rural Development, the UN aims to increase financial inclusion of the poor by developing appropriate financial products for them and increasing awareness on available financial services and strengthening financial literacy, especially among women. The UN’s financial inclusion product is financed by the United Nations Development Programme. Need for Financial inclusion:

• It helps in creating a platform for inculcating the habit to save money.
• It provides formal credit avenues.
• Plug gaps and leaks in public subsidies and welfare programmes.
• For credit availability
• For boosting savings
• Reduce leak in subsidy and welfare distribution.
• The 11^th Five Year Plan (2007-12) highlighted that significant segment of the India’s population had been excluded from the growth over the past decade and called financial inclusion a top priority.
• The facts reflect that out of 600,000 villages in the country, only about 30,000 have a commercial bank branch.
• Till recently, more than 50% of India’s population did not have any bank account and more than half of the total farmer households did not seek credit from either institutional or non-institutional sources of any kind

Financial inclusion in India:

• In the Indian context, the term financial inclusion was used for the first time in April 2005 in the Annual Policy Statement presented by Y. Venugopal Reddy, then Governor, Reserve Bank of India.
• The Report of the Internal Group to Examine Issues relating to Rural Credit and Micro finance (Khan Committee) in July 2005 drew strength practices from this announcement by Governor Y.Venugopal Reddy in the Annual Policy Statement for 2005-6 wherein he had expressed concern on the exclusion of vast sections of the population from the informal financial system.
• In the Khan Committee Report, the RBI exhorted the banks with a view to achieving greater financial inclusion to make available a basic “no –frill” banking account.
• In 2006, the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations, micro-finance institutions, and other civil society organizations as intermediaries for providing financial and banking services.
• The Bank asked the commercial banks in different regions to start a 100 % financial inclusion campaign on pilot basis.
• The Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customer’s account and service them through a variety of channels by leveraging on IT.

Government initiatives for financial inclusion in India:

• The Government recently announced “Pradhan Mantri Jan Dhan Yojana”, a national financial inclusion mission which aims to provide bank accounts to at least 75 million people.
• Several Startups are also working towards increasing financial inclusion in India.
• The government also came up with a policy under the name “rupee exchange” to exchange higher notes with the intent of clamping down on tax defaulters, trackdown corrupt officers and restoring sanity to the economic system.

Other measure includes:

• Mandating banks to lend to small-scale industries, agriculture sector and to small borrowers.
• Opening of bank branches in rural areas.
• Introduction of Lead Bank Scheme; the 20- Point Economic Programme and
• The Integrated Rural Development Programme.

Steps taken by RBI:

• In India, RBI has initiated several measures to achieve greater financial inclusion such as facilitating no-frill accounts and GCC’s for small deposits and credit.
• Relaxation on know-your-customer (KYC) norms, thereby simplifying procedure by stipulating that introduction by an account holder who has been subjected to the full KYC drill would suffice for opening such accounts.
• Engaging business correspondents (BCs), as intermediaries for providing financial and banking services.
• Recognizing that technology has the potential to address the issue of outreach and credit delivery in rural and remote areas.
• GCC, for helping the poor and disadvantaged with access to easy credit, banks have been asked to consider introduction of a general purpose credit card facility upto 25000 at their rural and semi-rural branches. The objective of this scheme is to provide hassle-free credit to bank’s customers.
• Simplified branch authorization to address the issue of uneven spread of bank branches.
• Opening of branches in unbanked rural centres to further step up the opening of branches in rural areas so as to improve banking penetration and financial inclusion rapidly.
• EBT-Electronic Benefits Transfer, to plug the leakages that are present in transfer of payments through the various levels of bureaucracy, government has begun the procedure of transferring payment directly to accounts of the beneficiaries.

Financial Inclusion Index

• In 2013, CRISIL, India’s leading credit rating and Research Company launched an index to measure the status of financial inclusion in India.
• CRISIL Inclusix is a tool to measure the extent of inclusion in India, right down to each of the 632 districts.
• CRISIL Inclusix is a relative index on a scale of 0 to 100, and combines three critical parameters of basic banking services— branch penetration, deposit penetration, and credit penetration—into one metric.

Reasons for low financial inclusion in India:

• The financial health of low-income segments in India shows that the reliance on financial products from non-institutional sources is high because these tend to be more tailored to their economic lives
• Most people especially the lower income groups find it inconvenient to understand different product offerings, financial jargon, and related terms and conditions.
• They don’t see bank as welcoming and often believe they are not for them.
• Households also lack an avenue to receive credible, low-cost and high-quality financial advice.
• Illiteracy and low income savings and lack of bank branches in rural areas continue to be roadblock to financial inclusion.
• Inadequate legal and financial structure.

How technology can help in overcome these barriers?

• Technology can provide more tailored financial products to the mass-market consumer.
• Technology can offer a simpler and seamless user experience. Banks and new entrants like payments banks are jockeying to win this user interface/user experience game.
• Public good tech infrastructure is dramatically reducing cost to serve. Electronic know your customer, for example, that builds on the Aadhaar platform has already reduced time to on-board a customer from a few days to a few minutes. Other innovations like e-Sign, which does away with the need for a “wet signature”, are beginning to proliferate.
• With the rise of fintech, financial inclusion seeks to promote the betterment of the world’s population through the use of financial services and tools available in an increasingly digital-based economy.

Controversy: Financial inclusion in India is often closely connected to the aggressive micro credit policies that were introduced without the appropriate regulations or customer education policies. The result was that the consumer’s become over-indebted. The challenge for those working in the financial inclusion field has been to separate micro-credit as only one aspect of the larger financial inclusion efforts and use Indian crisis as an example of the importance of having the appropriate regulatory and educational policy framework in place. Conclusion: Financial inclusion of the unbanked masses is a critical step that requires political will and bureaucratic support. It is expected to unleash the hugely untapped potential of the bottom of pyramid section of Indian economy. Financial inclusion will be good initiative towards achieving growth and prosperity.