Financial Inclusion

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society.

Financial Inclusion generally means

• To make banking services available to poor people unbanked and under banked areas in urban and rural areas.
• To promote habit of money-savings
• Investment in insurance, pension-investment by poor sections of the society

UN definition includes few other aspects such as competition, financial sustainability and clear regulations and industry performance standards in the definition of Financial Inclusion.

According to Alliance for Financial Inclusion Financial inclusion is now an important part of the mainstream thinking on economic development based on country leadership.

Need and Importance of Financial Inclusion

Economic Growth: Financial Inclusion also is desirable so as to convert savings into investment. As discussed earlier, country's savings rate usually refers to the percentage of gross domestic product (GDP) savings by households. Circular flow of income also helps the economy. As of now, the savings of the poor people are usually held in cash or in the form of some unproductive physical assets. There is need for curbing this tendency. They should be encouraged to make investment in Financial Product or Asset.  (Compared to if everyone just hid their money under pillow). From domestic saving at a peak of 38.1% of GDP in 2008 when India seemed to have entered a virtuous cycle of savings and growth, in 2012-13, the savings rate has fallen to 30.1% of GDP from 31.3% in 2011-12, the fourth consecutive year in which it fell. In the 1980s, many countries such as Japan, South Korea that focused on providing easy financial services to small businessmen eventually became the largest economies in the world. 

Welfare of Poor: Usually Poor and marginalized sections of society are forced to borrow at significantly higher rates of interest.  They are badly exploited by moneylenders and also forced to pay more for all goods and services as they busy in less quantities at a time. In India, the poor people don’t enjoy social security benefits. Thus Financial Inclusion has become important and top priority of any democratic government. 

Empowerment of people: This can also facilitate women empowerment, Self Help Groups. Financial inclusion translates into cheaper loans for people in unbanked and under-banked areas that result in faster growth of agriculture and small business.

Social Security and narrowing inequality: In India where a majority of people are without any social security benefit, financial inclusion can help them in later stages of life especially when social institutions such as families are breaking up.  The second phase of the financial inclusion plan talks about a pension scheme for the lower income and unorganised sector and micro-insurance through the nationalised insurance companies. Premium for insurance products will come from schemes like the RashtriyaSwasthyaBimaYogana. If there are no formal channels to save money such as banks, then low income households are more likely to fall victim to Ponzi schemes like Saradha chit fund in Bengal.

Income inequality falls more rapidly in areas that have more developed financial intermediaries (banks, insurance companies).

Extent of Financial Exclusion

The extent of financial exclusion from different perspectives / angularities can be presented based on five different data sources viz.:

(a) NSSO 59th Round Survey Results,

(b) Government of India Population Census 2011,

(c) CRISIL-Inclusix

(d) RBI Working Paper Series Study on ‘Financial Inclusion in India: A Case-study of West Bengal’ and

(e) World Bank ‘Financial Access Survey’ Results.

NSSO 70th Round Survey Results

• In agriculture nearly 40% of all loans came from informal sources with 26% advanced by moneylenders.
• Marginal land holding households suffer the most with only 15% of their credit from institutional sources such as the government, cooperatives and banks—for households in the highest land class (with land more than 10 hectares) the ratio is 79%.
• Out of over 600,000 rural habitations in the country, only about 30,000 or just 5% have a commercial bank branch.
• The proportion of people having any kind of life insurance cover is as low as 10 per cent,and the proportion having non-life insurance is an abysmally low 0.6 per cent.
• Prior to Jan Dhan Yojana, only 40% of population had bank accounts.
• Across regions, financial exclusion is more acute in Central, Eastern and North-Eastern regions. All three regions together accounted for 64% of all financially excluded farmer households in the country.
• However, over the period of five decades, there has been overall improvement in access to formal sources of credit by the rural households

Government of India Population Census 2011

• As per census 2011, only 58.7% of households are availing banking services in the country. However, as compared with previous census 2001, availing of banking services increased significantly largely on account of increase in banking services in rural areas.

CRISIL Financial Inclusion Index (Inclusix)

• In June 2013, CRISIL first time published a comprehensive financial inclusion index (viz.,Inclusix). For constructing the index, CRISIL identified three critical parameters of basic banking services namely branch penetration, deposit penetration and credit penetration.
• The CRISIL Inclusix indicate that there is an overall improvement in the financial inclusion in India.
• CRISIL –Inclusix (on a scale of 100) increased from 35.4 in March 2009 to 37.6 in March 2010 and to 40.1 in March 2011.

RBI Working Paper Study

• Sadhan Kumar (2011) worked out an Index on financial inclusion (IFI) based on three variables namely penetration (number of adults having bank account), availability of banking services (number of bank branches per 1000 population) and usage (measured as outstanding credit and deposit). The results indicate that Kerala, Maharashtra and Karnataka has achieved high financial inclusion , while Tamil Nadu, Punjab, A.P, H.P, Sikkim, and Haryana identified as a group of medium financial inclusion

 World Bank ‘Financial Access Survey’ Results

• In our country, financial exclusion can also be measured in terms of bank branch density, ATM density, bank credit to GDP and bank deposits to GDP is quite low as compared with most of developing countries in the world. For example no of bank branches per 1000 km in India is 30.43 as compared to 1429 in china.

Government of India Initiatives

(with focus on Role of RBI for Financial inclusion)

RBI has adopted a bank-led model for achieving financial inclusion and removed all regulatory bottle necks in achieving greater financial inclusion in the country. Further, for achieving the targeted goals, RBI has created conducive regulatory environment and provided institutional support for banks in accelerating their financial inclusion efforts .

While India’s six largest cities were found to have 10% of all bank branches, the bottom 50 districts merely have 2%. The prime motive of reopening the window for licenses by the RBI was to ‘achieve financial inclusion’. The inclusion targets come from three broad policy stances:

• Coverage: monitored by number of no-frills accounts and other such products
• Outreach: branches in different categories of habitation, and
• Deployment: priority sector, agriculture and weaker sections

The need for the inclusion focus comes from the fact that India is home to the world’s largest unbanked population. Just 1 in 2 Indians have a savings account and 1 in 7 Indians have access to bank credit.

There were three important initiatives taken by RBI for financial inclusion:

1969: Lead banking scheme (LBS). Under this scheme, RBI assigns a district to a particular bank. The bank will be responsible for promoting banking services and financial literacy, in that district.

2005: RBIset up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (2005–06). In the report RBI exhorted the banks with a view to achieving greater financial inclusion to make available a basic "no-frills" banking account. No frills accounts were started by many banks. No Frill accounts offer few basic banking services to accountholders.  Poor people can open bank accounts with very low balance or no balance. Norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50,000.

2006 - Business Correspondents (BC) system. This was intended to provide basic banking services at the door steps to people staying mainly in the unbanked and under-banked rural areas. The opening of branches in all rural areas is not viable because of high administrative costs involved. 

Financial Inclusion Network and Operations (FINO) is the India’s largest Business Correspondents company. Many Public Sector Banks, Private Sector banks, LIC etc have stake in it.

Swabhimaan: A major financial inclusion initiative was formally launched as “Swabhimaan” on 10 February, 2011 which aims at providing branchless banking through the use of technology. Banks will provide basic services like deposits, withdrawal and remittances using the services of Business Correspondents (Banks Saathi).  The initiative enables Government subsidies and social security benefits to be directly credited to the accounts of the beneficiaries, enabling them to draw the money from the Business correspondents in their village itself. 

Aadhar-enabled Bank Account: RBI has planned Aadhaar-linked bank accounts for all adults of India by January 2016 to meet its target on financial inclusion. It will greatly transform India by preventing the poor people falling into debt-traps of unlawful money-lenders, cashless transactions, elimination of poverty and corruption.

A basic Aadhaar-enabled bank account (AeBA) is a basic savings account (zero-balance) where a debit-card is issued. Aadhaar number is used as the account number. It can be opened instantly opened, without much documentation.

Transactions operate with fingerprint authentication only; as indicated by the Aadhaar logo on the card. PIN is not issued to zero-balance AeBA because it is aimed at financial inclusion of unbanked, illiterate, and rural people. Transactions like deposit, withdrawal, transfer, balance-check can be performed. AeBA is used for direct payment of social security benefits such as pensions, scholarships, NREGA wages, healthcare, subsidy for LPG, kerosene, PDS ration, fertilizers etc.

Micro ATMs: Generally, a micro-ATM consists of a laptop computer or smart-phone equipped with 2G-internet, fingerprint scanner, receipt-printer, speaker and power backup of solar or battery. It is human-operated by a commission agent called a banking correspondent (BC) or ‘Bank Sathi’ so that illiterate customers do not face problems of ATM machine operations. Some banks issue photo bankcards, that are a boon to rural people and migrant workers because they work not only as bankcards but also as identity cards. RuPay card by Indian payment-bridge NPCI and Saral Money Visa are two prominent AeBA bankcards. The idea of Kiosk Bankinghas been tried in rural areas in the form of ATMs and Internet Kiosks, it could not succeed much as there is also lack of education and awareness in rural areas.

Direct Cash Transfer: In November 2012, Government announced Direct Cash transfer scheme, under which the Direct Cash transfer scheme, Government will directly deposit payments, subsidies, scholarships, pensions etc into the beneficiary’s bank account.

There are about six lakh villages in India, out of these only 75,000 villages have a bank branch or business correspondent agents (BCA). So for the poor people in rest of 525000 villages still face the problems we saw` in MNREGA payment withdrawl. Finance Ministry asked the banks to have at least one bank branch or business correspondent agents for every village or group of villages with 1,000 to 1,500 households.

Use of other Internet Technologies Common Services Centres (CSCs):  The scheme was started in 2006 with an aim to set up of one lakh internet enabled centers in rural areas under the National e-Governance plan (NeGP). The preference was to villages without Banking Correspondents (BCs).  Department of Electronics and IT (DEIT) is made responsible to install Common Service Centre (CSC). These CSCs will serve as the BC. Initially, CSCs are to be used only for opening new accounts of beneficiaries under the scheme for Direct Cash Transfer. Once banks make the infrastructure (including software and hardware) is in place for cash transactions, the CSC will allow villagers to withdraw cash from their accounts.

Issuance of General Credit Cards: With a view to helping the poor and the disadvantaged with access to easy credit, banks have been asked to consider introduction of a general purpose credit card facility up to 25,000 at their rural and semi-urban branches. The objective of the scheme is to provide hassle-free credit to banks’ customers based on the assessment of cash flow without insistence on security, purpose or end use of the credit. This is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned.

Simplified branch authorization: To address the issue of uneven spread of bank branches, in December 2009, domestic scheduled commercial banks were permitted to freely open branches in tier III to tier VI centres with a population of less than 50,000 under general permission, subject to reporting. In the north-eastern states and Sikkim, domestic scheduled commercial banks can now open branches in rural, semi-urban and urban centres without the need to take permission from RBI in each case, subject to reporting.

Opening of branches in unbanked rural centresTo further step up the opening of branches in rural areas so as to improve banking penetration and financial inclusion rapidly, the need for the opening of more bricks and mortar branches, besides the use of BCs, was felt. Accordingly, banks have been mandated in the April monetary policy statement to allocate at least 25% of the total number of branches to be opened during a year to unbanked rural centres.

RBI instructed commercial banks in different regions to start a 100% financial inclusion campaign on a pilot basis as a precursor to its vision to open 600 million new bank accounts, and service them by using IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a roadblock to financial inclusion in many states and there is inadequate legal and financial structure.

Opening of no-frills accounts: Basic banking no-frills account is with nil or very low minimum balance as well as charges that make such accounts accessible to vast sections of the population. Banks have been advised to provide small overdrafts in such accounts.

Relaxed know-your-customer (KYC) norms: KYC requirements for opening bank accounts were relaxed for small accounts in August 2005, thereby simplifying procedures by stipulating that introduction by an account holder who has been subjected to the full KYC drill would suffice for opening such accounts. The banks were also permitted to take any evidence as to the identity and address of the customer to their satisfaction. It has now been further relaxed to include the letters issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number.

Financial Inclusion Index- Inclusix

On June 25, 2013, India’s Credit Rating Company, CRISIL, launched an index to measure the status of financial inclusion in India. It has devised financial inclusion index called “Inclusix” to measure the extent of inclusion in India, right down to each of the 632 districts.

It measures financial inclusion on three parameters:

• branch penetration
• deposit penetration and
• credit penetration

In 2018, the government of India launched a new financian inclusion index. It will be measure of access and usage of basket of formal financial products and services that includes savings, remittances, credit, insurance and pension products.

The index has three measurement dimensions (i) Access to financial services (ii) Usage of financial services and (3) Quality. It will serve as single composite index that will give snap shot of level of financial inclusion which will guide Macro Policy perspective.

Progress in Financial Inclusion

• Financial inclusion got a boost from the Pradhan Mantri Jan Dhan Yojana (PMJDY) that added 336.6 million new basic savings bank deposit (BSBD) accounts, expanding the base of such accounts to 536 million by March 2018.
• The banking infrastructure comprising bank branches, ATMs, digital kiosks, customer service points (CSP), business correspondents (BCs), point of sale (PoS) terminals and mobile ATM vans currently cover 5,69,547 villages out of the total of close to 6,60,000. But, of them, 5,15,317 villages (90.47 per cent) are covered by BCs offering limited services.
• In view of commendable penetration of banking services and sustained policy of financial inclusion, 80 per cent of Indian adults have a bank account today. Indeed, a great achievement. But the worrying point is, half of them are rarely used. According to the World Bank, 48 per cent of the country’s bank accounts have had no transactions in the last one-year. Globally, the percentage of inoperative accounts stands at 25.
• While applauding the outreach and development of banking infrastructure, the IMF bemoans that only 13 per cent of Indian adults borrow through formal channels. Despite priority sector lending norms, hardly 35 per cent of Indian farmers utilise institutional loans. The rest probably relies on alternative sources, including moneylenders/indigenous bankers, paying high interest rates. The agenda of financial inclusion includes development of entrepreneurship that can be nurtured only when bank customers can save, borrow, and remit/receive funds.
• Having invested huge resources in augmenting financial inclusion , the gap in its usage needs can be filled with suitable strategies to impart financial counselling and digital literacy. Financial literacy enables bank customers to make informed decisions in using financial services for their entrepreneurial growth and well-being.
• The RBI has taken several initiatives that include a recent launch of a pilot project of setting up Centres of Financial Literacy (CFL) based on the hub-and-spoke model. Identified change agents will be trained at CFLs, who in turn would undertake financial education in villages. Looking to the rising customer base of banks and the lack of financial knowledge, the task ahead is daunting.

Financial outreach

According to Standard & Poor’s ‘Global Financial Literacy Survey – 2014’, 33 per cent of adults in the world are financially literate. As a result, 3.5 billion adults across the globe, most of them from developing economies, do not have any understanding of financial products and services. The average financial literacy rate is 28 per cent of adults among BRICS (Brazil, Russia, India, China and South Africa) economies — with India’s being 24 per cent, China 26 per cent, and South Africa 42 per cent.

While the financial inclusion agenda is struggling between the pincers of huge pile of inoperative accounts and financial illiteracy among customers, there is an ostensible disdain among banks towards pursuing it. Due to rising operating costs of branches, banks are increasingly opting to deliver banking through digital mode.

There has been a decline in the number of newly opened bank branches — from 8,749 in FY15 to 3,948 in FY18. But the fall is more perceptible in rural centres with population below 9,999 (Tier-5 and Tier-6). The number of new branches opened in such centres has dropped from 3,274 to 1,067 during the three-year period.

The number of ATMs has also started to drop — from 2,08,354 in March 2017 to 2,07,052 by March 2018. The spread of ATMs is already skewed with 56 per cent of them operating in urban and metro areas.

The number of bank branches and ATMs will witness further drop in the next few years due to merger of State Bank Associates with SBI and Vijaya Bank and Dena Bank amalgamating with Bank of Baroda.

But in order to ensure an even spread of branch network in the hinterland, the branch expansion policy of the RBI stipulated that just 25 per cent of of the newly opened bank branches should be located in centres falling in Tier-5 (population of 5,000-9,999) and Tier-6 (population below 5,000).

Effectively, now 75 per cent of bank branches could be located freely in any centre at the discretion of banks on commercial consideration.

When the banking system is fast moving towards digitisation, the RBI can review its branch expansion policy and de-link opening of branches in Tier 5 and 6 centres to the total number of branches.

Having achieved considerable progress in financial inclusion, the next stage is to harness immense rural potentiality for business growth. Steady and coordinated efforts of all stakeholders are necessary, more at the local level by disseminating financial and digital literacy. Banks may have to innovate strategies to extend credit by setting up credit kiosks on the model of digital kiosks.

While digital channels are able to provide most of the banking services, they are unable to popularise loan products through digital platform due to lack of digital literacy.

If financial inclusion efforts are to be fully harnessed and taken forward, the regulator and banks will have to work in cohesion with local government agencies to educate masses on a large scale, highlighting rights and responsibilities.

Taking a cue from the slackness in financial inclusion experienced in the last three years, it is necessary to reinstate focus with appropriate policy reforms and enhancing rigour in its monitoring compatible to the emerging digital ecosystem.

Financial Literacy Initiatives

Financial education, financial inclusion and financial stability are three elements of an integral strategy, as shown in the diagram below. While financial inclusion works from supply side of providing access to various financial services, financial education feeds the demand side by promoting awareness among the people regarding the needs and benefits of financial services offered by banks and other institutions. Going forward, these two strategies promote greater financial stability.

Financial Stability Development Council (FSDC) has explicit mandate to focus on financial inclusion and financial literacy simultaneously.

RBI has issued revised guidelines on the Financial literacy Centres (FLC) on June 6, 2012, for setting up FLCs, as detailed in Box 1 above.

Growth In SHG-Bank Linkage

This model helps in bringing more people under sustainable development in a cost effective manner within a short span of time. As on March 2011, there are around 7.46 million saving linked SHGs with aggregate savings of Rs.70.16 billion and 1.19 million credit linked SHGs with credit of Rs. 145.57 billion (Source: NABARD, Status of Microfinance in India).

Growth OfMfis

Though RBI has adopted the bank-led model for achieving financial inclusion, certain NBFCs which were supplementing financial inclusion efforts at the ground level, specializing in micro credit have been recognized as a separate category of NBFCs as NBFC-MFIs.

At present, around 30 MFIs have been approved by RBI. Their asset size has progressively increased to reach Rs. 19,000 crore as at end Sept 2013.

Bank Credit To MSME

MSME sector which has large employment potential of 59.7 million persons over 26.1 million enterprises, is considered as an engine for economic growth and promoting financial inclusion in rural areas.  MSMEs primarily depend on bank credit for their operations.

Total bank credit to MSME sector stood at Rs 833 billion in FY 2005 and has grown at a compounded average growth rate of 25 per cent plus to Rs. 7.9 trillion in 2014. 

Though Banks have lend around Rs 8 trillion to MSME sector, MSME sector is still under capitalised and badly in need for capital infusion. According to International Finance Corporation (IFC), MSME sector faces a severe capital shortage of Rs 32.5 trillion. Out of this, debt shortfall is Rs 26 trillion. This is the shortfall that organised financial sector will have to provide to MSMEs to ensure that MSMEs are properly capitalised and can continue to grow. 

Insurance Penetration In The Country

The Penetration For The Insurance Sector As A Whole In The Year 2013 Was 3.9 Percent In India, As Against World Average Of 6.3 Percent. Insurance Penetration, Measured As The Ratio Of Premium To GDP, Was 3.3 Percent Of Life Insurance And 0.7 Percent For General Insurance In 2014-15.

Equity Penetration In The Country

The number of investor accounts accounted for a meagre 1.71% of total population of the country.

Financial Inclusion Initiatives – Private Corporates

A few large private corporate have undertaken projects such as E-Choupal/ E- Sagar(ITC), HaryaliKisan Bazaar (DCM), Project Shakti (HUL), etc. Reportedly, these pioneering projects have brought about vast improvement in the lives of the participants and set the tone for economic development in their command areas; which is a pre-requisite for Financial Inclusion efforts to be undertaken by the banking system.