Financial inclusion 

According to the World Bank, Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs. The Government has made financial inclusion a top priority. The goal is to provide access to various financial services, such as a basic savings bank account, need-based credit, remittance facility, insurance, and pension, to the excluded sections, i.e., the weaker sections and low income groups. Financial inclusion is a critical driver of global economic growth and poverty alleviation.

A slew of initiatives have been launched by the Government of India, the Reserve Bank of India, and NABARD in order to achieve comprehensive financial inclusion. Some of the significant initiatives include the SHG-Bank Linkage Programme, the opening of No Frills Accounts, mobile banking, Kisan Credit Cards (KCC), the Pradhan Mantri Jan Dhan Yojna, and others.

What is Financial Inclusion?

• Exclusion from the financial system is commonly used to define financial inclusion.

If a target group does not have access to mainstream formal financial services such as banking accounts, credit cards, insurance, payment services, and so on, they are considered financially excluded.

• In 2006, the Government of India formed a committee chaired by Dr. C. Rangarajan to study the pattern of exclusion from access to financial services across region, gender, and occupational structure, as well as to identify the barriers faced by vulnerable groups in accessing credit and financial services and to recommend steps needed for financial inclusion.
• In January 2008, the committee submitted its report. According to the committee, financial inclusion is defined as:

The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.

• Financial inclusion is achieved when all individuals and businesses have access to and can use a wide range of financial services that are responsibly and affordably provided by sustainable institutions in a well-regulated environment.

National Strategy for Financial Inclusion

• The Reserve Bank of India (RBI) has devised a National Strategy for Financial Inclusion (NSFI) for the period2019-2024.
• It is an ambitious strategy that aims to strengthen the ecosystem for various modes of digital financial services in all Tier II to Tier VI centres in order to build the infrastructure needed to transition to a cashless society by March 2022.

Objectives

• Raise consumer awareness and educate them about financial services, the availability of various types of products, and their features.
• A target has been set for every willing and eligible adult who has enrolled in the Prime Minister Jan Dhan Yojana to be enrolled in an insurance scheme and a pension plan by March 2020.
• Changeattitudes in order to transformknowledge into action.
• Make sure that customers understand their rights and responsibilities as financial services customers.
• Increase the reach of banking outlets by March 2020 to provide banking access to every village within a 5-kilometer radius or a hamlet of 500 households in hilly areas.
• By March 2024, every adult should have access to a financial service provider via a mobile device.

Stakeholders

• Financial Consumers
• Banks, Non-banking financial companies (NBFCs), etc.
• Educational Institutions
• Non-Governmental Organizations(NGOs)
• Regulators in the Financial Sector
• Centraland state governments
• International players such as the OECD, G-20, and others.

Significance

• Steps must be taken to strengthen the digital financial services ecosystem, including increased awareness of the use of digital modes of transaction, increased acceptance infrastructure, and a safe environment that incorporates consent and privacy principles.
• There is a need to develop a sector-specific action plan to monitor targets and review progress, as well as a strong regulatory and legal framework aimed at protecting customers' interests, promoting fair practises, and limiting market manipulations.
• At the moment, financial inclusion policies are aimed at specific sectors such as small and medium-sized businesses, agriculture, or specific regions such as aspirational districts.
• The strategy also calls for the Public Credit Registry (PCR) to be fully operational by March 2022, so that authorised financial entities can use it to evaluate credit proposals from all citizens.

Financial Inclusion – Initiatives

1.Jan Dhan-Aadhar-Mobile (JAM) Trinity

• The combination of Aadhaar, PMJDY, and an increase in mobile communication has transformed how citizens access government services.
• According to estimates in August 2021, the total number of Jan Dhan scheme beneficiaries was more than 430 million.
• Aadhaar has significantly altered the concept of individual identity, resulting not only in a secure and easily verifiable system, but also in an easy-to-obtain system that will aid in the financial inclusion process.
• The government has also launched a number of flagship schemes to promote financial inclusion and provide financial security in order to empower the country's poor and unbanked citizens.
• The Pradhan Mantri Mudra Yojana, the Stand-Up India Scheme, the Pradhan Mantri Jeevan Jyoti Bima Yojana, the Pradhan Mantri Suraksha Bima Yojana, and the Atal Pension Yojana are among them.

2.Financial services expansion in rural and semi-urban areas

• The Reserve Bank of India (RBI) and NABARDhave launched initiatives to promote rural financial inclusion.
• These include the establishment of bank branches in remote regions.
• Kisan Credit Cards (KCC) are being issued.
• Self-help groups (SHGs) are linked with banks.
• Increasing the number of ATMs.
• Businesscorrespondent model of banking.

3.Digital Payments Promotion

• In comparison to the past, digital payments have become more secure thanks to NPCI's strengthening of the Unified Payment Interface (UPI).
• The Aadhar-enabled payment system (AEPS) allows an Aadhar-enabled bank account (AEBA) to be used at any location and at any time through the use of micro ATMs.
• The payment system has become more accessible as a result of offline transaction-enabling platforms such as Unstructured Supplementary Service Data (USSD), which allows users to use mobile banking services without the need for an internet connection, even on a basic mobile handset.

4.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 collegechildren, 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.

Financial Inclusion – Significance

• Financial inclusion enables good financial decision making through financial literacy and qualified advice.
• It also enables access to financial services for all, particularly vulnerable groups such as weaker sections, minorities, migrants, the elderly, micro entrepreneurs, and low income groups, at an affordable cost, allowing them to:
  • Manage their finances on a day-to-day basis confidently, effectively, and securely;
  • Plan for the future in order to protect themselves from short-term fluctuations in income and expenditure, as well as to create wealth and profit from financial sector developments;
  • Dealing with financial difficulties effectively reduces their vulnerability to the unexpected.
• Various initiatives under financial inclusion have resulted in significant changes in the last-mile connectivity of financial services to its people.
• Financial inclusion has the potential to reduce poverty and create jobs by providing underprivileged and marginalised sections of society with access to financial resources.
• Previously, private institutions did not engage with the poor on a large scale as customers. This has now changed, with active participation from private players.
  • Payment banks such as paytm, airtel money, and jio money have realised that bringing the poor into the financial net benefits their business models as well.
• The integration of the JAM trinity and the Direct Benefit Transfer (DBT) scheme has been largely successful.
  • This has resulted in a significant improvement in terms of targeted and accurate payments.
  • It has also aided in the elimination of duplicate entries and the reduction of reliance on cash payments.

Financial Inclusion – Challenges

1.Access to Bank Accounts Is Not Universal

• Bank accounts provide access to all financial services.
• However, according to a World Bank report, approximately 190 million adults in India do not have a bank account, making India the world's second largest unbanked population after China.

2.Digital Divide

• The following are the most common barriers to the adoption of digital technology that could promote financial inclusion:
  • Inadequate availability of appropriate financial products.
  • Inability of stakeholders to use digital services due to a lack of skills.
  • Problems with infrastructure.
  • Low-income customers who cannot afford the technology needed to access digital services.

3.Implementation Issues

• The Jan Dhan scheme resulted in the creation of a large number of dormant accounts that never saw any banking transactions.
• All such activities impose costs on the institutions, and thus, massive operational costs proved to be detrimental to the overall goal.
• To avoid these unintended consequences, it is critical that all stakeholders participate in such programmes with proper intent and not just for the sake of participating.

4.Economy Is Informal and Cash-Dominated

• India has a heavily dominated cash economy, which makes digital payment adoption difficult.
• Furthermore, the International Labour Organization (ILO) estimates that approximately 81 percent of all employed people in India work in the informal sector.
• The combination of a huge informal sector along with a high dependence on cash mode of transaction poses an impediment to digital financial inclusion.

5.Gender Inequality in Financial Inclusion

• According to the 2017 Global Findex database, 83 percent of males over the age of 15 in India had a financial institution account in 2017, compared to 77 percent of females.
• This is due to socioeconomic factors such as men having a greater availability of mobile handsets and internet data facilities than women.

6.Inadequate Credit Penetration

• The lack of information available to formal creditors to determine credit worthiness is one of the main constraints in providing credit to low-income households and informal businesses. As a result, the cost of credit is high.
• As a result, the number of loan accounts per 1,000 adults in India was 154 in 2016. This is quite low when compared to comparable economies such as the BRICS nations.