Financial inclusion is a process that enables improved and better sustainable economic and social development of the country. It focuses on raising the standard of living of the underprivileged people in the society with the objective of making them self-sufficient and well informed to make better financxial decisions. Also, it acknowledges the participation of the low-income groups based on the extent of their access to financial services in economic growth.

The aim of financial inclusion is delivery of financial services to low income groups with the provision of equal opportunities.

Historical Developments:

Contrary to general belief, historically, India is a pioneer in financial inclusion. The Cooperative Credit Societies Act, 1904 gave an impetus to cooperative movement in India. The objective of cooperative banks was to extend banking facilities, mainly availability of credit on easy terms compared to money lenders who were well known to charge high rates of interest.

• Financial inclusion exercise explicitly started with the nationalization of State Bank of India in 1955.
• Banks were nationalised in 1969 to serve the unbanked population, mainly weaker sections of the society as well as rural areas.
• The concept of priority sector lending became important by 1974 which implied directed lending to unbanked areas, and in 1980, eight more private banks were nationalised to extend banking in rural and remote areas. Since then, there has been a considerable reorientation of bank lending to accelerate the process of development, especially of the priority sector, which had not previously received sufficient attention.
• Since 2005, Government of India along with the Reserve Bank of India (RBI) and National Bank for Reconstruction and Development (NABARD) has been initiating a number of concerted measures to enhance financial inclusion in India. These measures include Self Help Group- bank linkage programme, use of business facilitators and correspondents, easing of ‘Know Your Customer’ (KYC) norms, electronic benefits transfer, use of mobile technology, opening ‘no-frill accounts’ and emphasis on financial literacy.
• Opening customer service centres, credit counselling centres, Kisan Credit Card, National Pension Scheme, MGNREGS, Aadhaar scheme. The banking penetration, despite concerted efforts was low.

To ensure a banking account in every household, the Prime Minister announced the need for focused efforts. The objective of Pradhan Mantri Jan Dhan Yojana (PMJDY) was widening access to various basic financial services like savings bank account; need based credit, remittances facility and insurance and pension to excluded sections, mainly weaker sections and low-income groups. The Government continued its efforts towards achieving financial inclusion by introducing Micro Units Development Refinance Agency (MUDRA) to focus on providing credit to small entrepreneurs. In a logical and well-sequenced step, the Central government extended social security to the masses. The flagship scheme, Atal Pension Yojana (APY) aims to provide old age income security to the working poor in the unorganised sector. Jeevan Jyothi insurance scheme providing a one year cover, renewable annually, offering life insurance and Suraksha insurance scheme, renewable annually, providing insurance and Suraksha insurance scheme, renewable annually, providing insurance to cover death or disability on account of an accident.

Challenges:

The key challenges in extensively extending financial inclusion are:

1. Some Accounts under PMJDY are not operative due to lack of funds with account holders. Implementing technological advancements is a matter of concern.
2. Lack of financial literacy in the rural households.
3. There is a need for technical and institutional infrastructure for e-payment systems to service a large number of new and existing accounts.
4. There is a requirement of sufficient technical skill development and training for banks and institutional staff.
5. Security of transactions is a matter of concern.
6. Lack of ease in transaction related activities in banks is clearly demonstrated by the repetitive behaviour of rural households’ persistence in taking loans from the money lenders.
7. There is a need for greater use of technology.
8. Factors such as lower income or asset holdings, lack of awareness about the financial products, perceivably unaffordable products, high transaction costs, products which are not convenient, inflexible, and not customized to the rural sector income pattern are a major barrier for gaining access to the financial system.
9. Costs in terms of increasing expenditure on IT deployment and risks in terms of monetary loss, data theft and breach of privacy are a concern.
10. Nearly 31 crore new accounts have been opened in previous 3 years under PMJDY and nearly 80% of these are first time users. This can be a threat to cyber security especially when KYC norms have been diluted.

The governments, globally, have been making effort to extend financial services to large segments of the population because financial inclusion promotes economic equality and economic growth. The issue of digitization, necessary for achieving higher financial inclusion, is serious and needs analysis. The country has low level of literacy, with English literacy of not more than 10% of the population. Given the fact that all electronic devices have English numerals and all communication on digital banking is also in English, there is the natural barrier to completely digitize Indian economy during the immediate period. 

The cost of providing equipment in remote parts of the country and ensuring seamless connectivity at the affordable cost would be another challenge that would need to be addressed. In view of the success of PMJDY, a new gap clearly emerged and that is regulation of the micro and rural sector.

Tit-Bits:

Baseline Ranking of Aspirational Districts.

The NITI Aayog launched the baseline ranking for the Aspirational Districts recently. These rankings are to be based on published data of 49 indicators across five developmental areas of Health and Nutrition, Education, Agriculture and Water Resources, Financial Inclusion and Skill Development and Basic Infrastructure.

‘Transformation of Aspirational Districts’ programme aims to quickly and effectively transform some of the most underdeveloped districts of the country. The broad contours of the programme are Convergence (of Central and State Schemes), Collaboration (of Central, State level ‘Prabhari’ Officers and District Collectors), and Competition among districts driven by a Mass Movement a Jan Andolan. With States as the main drivers, this program will focus on the strength of each district, identify low-hanging fruits for immediate improvement, measure progress, and rank districts.

Health and Nutrition, Education, Agriculture and Water Resources, Financial Inclusion and Skill Development, and Basic Infrastructure are this programme’s core areas of focus. Districts are prodded and encouraged to first catch-up with the best district within their state, and subsequently aspire to become one of the best in the country, by competing with, and learning from others in the spirit of competitive and cooperative federalism.