We require a more inclusive financial inclusion index

Synopsis: Recently, the Reserve Bank of India (RBI) unveiled its newly conceptualized Financial Inclusion Index to “capture the extent of financial inclusion across the country”. For meaningful financial inclusion, we must have meaningful metrics in the public domain.

Introduction

RBI recently announced the formation of a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country.

The annual FI-Index for the period ended March 2021 stood at 53.9 compared with 43.4 for the period ended March 2017. The FI-Index will be published in July every year.

What are the outlines of the new Index?

A total of 97 indicators were used to make this index across three broad parameters:

– Access (35%)

– Usage (45%)

– Quality (20%).

In addition to banking services the index includes insurance, pension and digital payments. There is no base year. A score of 0 measures complete financial exclusion and 100 indicates full financial inclusion. Inequality at the district level is being mapped as one indicator of Quality.

At a conceptual level, this index aims to capture much more than the single table measuring the country’s progress on financial inclusion in RBI’s Annual Report.

Why RBI’s ‘financial inclusion index’ is much needed?

Currently, for tracking financial inclusion in India, there has been a high dependence on surveys, with the World Bank Findex and Financial Inclusion Insights. However, RBI is best placed to bring out a truly comprehensive national database, as much of the needed data is already being captured by the banking system, even though it is not placed in the public domain.

Why is data on financial inclusion important?

Financial inclusion is a policy objective with multiple benefits. Financial inclusion is among the most critical objectives for long-term equitable growth and a financially-stable economy.

A country like India where a large proportion of its population is excluded from the financial sector, is not only not equitable but will also have a relatively weak financial sector.

Given the heterogeneity of a country like India, more data, the more the insights and the easier it is to identify specific issues that affect different classes of consumers and appropriate solutions can be devised.

A good measure of financial inclusion, therefore, will help monitor and benchmark the performance of India as a whole and not just one stakeholder.

What more can be done to improve the index?

First, RBI should disclose details of the indicators it has used for each of the three categories, Access, Usage and Quality. As this can help service providers and India’s central and state governments focus their efforts more effectively.

Second, at the very least, district-level data on all indicators should be captured to understand where additional support is needed.

Third, a breakup across all categories for gender at the district level is crucial. India had pledged to close the gender gap in financial inclusion by implementing the Denarau Action Plan adopted in Fiji at the 2016 Global Policy Forum.

The first step towards this would lie in generating gender-wise data on financial services. India has a very wide gender gap, with some regions better than others, but there is hardly any official data. For instance, we do not know the number of active women business correspondents in each district.

Source: This post is based on the article “We require a more inclusive financial inclusion index” published in Live Mint on 30th Sep 2021.

Terms to know

• Denarau Action Plan