Financial Inclusion – Significance & Challenges – Explained Pointwise

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. Poverty reduction & Social Equity: 
   1. Extends essential financial tools (savings, loans, insurance) to the poor, helping them build assets, manage risk, and break the cycle of poverty.
   2. Empowers migrants, farmers, daily wage workers, and self-employed individuals to participate meaningfully in the economy. 
   3. Directly supports women’s empowerment and gender equality by enabling access to finance, fostering economic independence, and improving household welfare. 
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).
6. Economic Growth: Brings more citizens into the banking net, increasing savings, investment, and productive economic activity, which fuels GDP growth.  
7. Formalisation of Economy: Promotes the transition from informal to formal economy, increasing transparency, accountability, and tax compliance.
8. Efficient Welfare Delivery (DBT, Insurance, Pensions): Financial inclusion enables targeted Direct Benefit Transfers (DBT) and the JAM Trinity system, reducing leakages, improving efficiency, and ensuring benefits reach the intended recipients. It facilitates affordable insurance and pension schemes for vulnerable and informal sector workers.

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 a 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:

1. Pradhan Mantri Jan Dhan Yojana (PMJDY):
   • Launched in 2014 as a National Mission for Financial Inclusion, PMJDY provides every citizen with a zero-balance bank account, affordable credit, insurance, remittance, and pension facilities.
   • Over 56 crore bank accounts have been opened, with a significant share for women and rural populations.
2. Pradhan Mantri Mudra Yojana (PMMY):
   • Enables collateral-free, easy-access microcredit for small and micro enterprises, helping boost entrepreneurship among non-corporate, rural, and informal sector workers.
   • Loans up to Rs 10 lakh under three categories (Shishu, Kishor, Tarun) have fostered job creation and small business growth.
3. Stand Up India Scheme: Facilitates bank loans between Rs 10 lakh and Rs 1 crore for SC/ST and women entrepreneurs to launch greenfield enterprises, ensuring inclusion in self-employment and business ownership.
4. Atal Pension Yojana (APY): Provides pension coverage for the unorganized sector, aiming for safe, inclusive retirement security (guaranteed monthly pension post age 60).
5. Pradhan Mantri Suraksha Bima Yojana (PMSBY) & Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): Affordable insurance schemes delivering accident, disability, and life insurance to millions of low-income citizens for minimal annual premiums.
6. Digital Payment: Unified Payments Interface (UPI), Aadhaar-enabled payments, Bharat Interface for Money (BHIM), and the creation of Digital Banking Units have dramatically boosted digital transactions, mobile banking, and financial empowerment.
7. Jan Dhan-Aadhar-Mobile (JAM) Trinity: The combination of Aadhaar, PMJDY, and an increase in mobile communication has transformed how citizens access government services.
8. 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.
9. Financial Inclusion Index: It is a composite, annual measure developed by RBI to objectively assess and monitor the extent of financial inclusion across India. It captures the penetration and usage of financial services—banking, investments, insurance, postal, and pension sectors—for all individuals and households in the country. The index comprises three broad parameters — access, usage, and quality, having weight 35%, 45% and 20%, respectively. The index ranges from 0 (complete exclusion) to 100 (full inclusion).

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 need to be realigned to help banks reach the deprived and vulnerable population and provide them with hassle-free doorstep service.
3. Partnership: The bank-non-bank 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.

Conclusion:
Financial inclusion is critical for India’s journey towards inclusive growth, digital empowerment, social justice, and long-term developmental resilience.