Financial inclusion, the simplest definition of it, is the equal availability of opportunities to access financial services. It is a process that allows people and small businesses to access affordable and appropriate financial products and services like loans, banking, and insurance when they need them (1, 2).
Efforts of financial inclusion typically target any country’s unbanked and underbanked population. And it is not limited to merely having a bank account. Since even if you have access to a bank account, you can still remain excluded from financial services.
If a nation doesn’t have an inclusive financial system, it can hinder its overall economic development, especially the underprivileged population. Countries like India need effective financial inclusion to uplift their poor and disadvantaged individuals.
Why Does India Need a Strong Financial Inclusion Strategy?
The Indian government hopes to establish a culture of saving and investing among the rural population through financial inclusion, which will help to enhance the country’s economy.
According to the Indian administration, bringing the weak and underprivileged elements of society into a formal financial system will assist in protecting their financial riches and other resources during times of crisis.
Furthermore, access to official banking credit facilities reduces the possibility of usurious lenders exploiting this population. The provision of timely financing via official lending systems will also boost the entrepreneurial spirit of lower-income people, who are currently reliant on family, friends, and money lenders for credit.
As a result, providing the unserved with access to formal banking can help them minimize their reliance on costly informal funding sources, lessen their exposure to economic shocks, and create jobs (5).
Factors Affecting Financial Inclusion
Since India is such a huge and diverse nation, there is a wide range of income and education levels among different sections of the population. It leads to varying levels of exposure to financial services and products. Consequently, certain population segments are unaware of various financial products (6).
As per the National Strategy for Financial Inclusion 2019-2024 (7), other factors contributing to financial exclusion are a lack of surplus income, high transaction costs, a lack of essential documentation to access services and products, and remoteness of the unserved population.
- Place of Living: Most commercial banks operate in commercial areas and prefer to set up their branches in profitable areas. Meaning people living in rural areas find it challenging to access financial services.
- The Lack of Legal Identity and Gender Biasness: Women, refugees, and minorities are typically excluded from accessing financial services due to multiple reasons like lack of legal identities and property or assets.
- Limited Financial Services Knowledge: Financial literacy and incomplete education are major hurdles in accessing financial services.
- Low-Income Level and High Bank Charges: People’s financial prominence has always played a big role in accessing various financial services. In addition, there are often several hidden bank changes that demotivate individuals from availing these services.
- Inflexible Terms and Services: Individuals and small businesses are least interested in strict terms and conditions in financial services, like minimum balance requirements.
- Type of Occupation and Business: Occupation nature is another important factor in availing of financial services. Most banks do not prefer small borrowers and making bets on unorganized sectors (8).
The Introduction of Financial Inclusion Concept in India
The concept of extending financial services to individuals and businesses has always been the goal of our government since the 1950s (9).
And there has been tremendous progress in this area since the introduction of the financial inclusion concept by the Reserve Bank of India in 2005 (10).
Objectives of Financial Inclusion:
- A simple, no-frills bank account for sending and receiving money
- Products that help you save money (including investment and pension)
- Overdrafts and simple credit products tied to no-frills accounts
- Money transfer or remittance services
- Non-micro (life) and micro (health) insurance (life and non-life)
According to RBI, as measured via its ‘FI-Index,’ the financial inclusion in India has improved by 24% between March 2017 and March 2021. The FI-Index, Financial Inclusion Index, includes banking, postal services, investments, pensions, and insurance information. It offers the highest weightage on the use of various financial services; 45%, followed by access; 35% percent, and quality; 20%.
The RBI has taken several actions to promote financial inclusion, including issuing KCC, Kisan Credit Cards, leveraging technology to improve financial literacy, and expanding banking touchpoints in rural areas to enable seamless delivery of credit and other financial services products.
Government Schemes to Promote Financial Inclusion
The Indian government has always recognized the need for financial inclusion for economic progress. As we mentioned, in the 1950s, the government began the process of financial inclusion by nationalizing life insurance organizations and banks. Following that, it launched a slew of initiatives and programs, including the NSFI, National Strategy for Financial Inclusion, which was backed by the FIAC, Financial Inclusion Advisory Committee in June 2017.
The Indian government has introduced several programs, including:
- PMJDY, Pradhan Mantri Jan Dhan Yojna (2014): The scheme aims to ensure financial inclusion for people with no bank accounts. The government had opened accounts for 43.2 crore beneficiaries under the scheme as of September 1, 2021, with deposits totaling 144870.1 crore INR 19.8 billion USD) and issued 31.3 crore RuPay cards. Women accounted for 55.4% of account holders, 66% from rural or semi-urban areas.
- PMMY, Pradhan Mantri Mudra Yojana (2015): The Indian government launched this scheme to offer long-term and working capital loans to small businesses in manufacturing, trading, and service sectors, including the agriculture sector. Except for 2020-21, the MLIs have met the government’s annual targets every year. A target of Three lakh crores INR (41 billion USD) has been established for 2021-22, of which 20% has already been met as of July 30, 2021.
- Stand-Up India (2016): The scheme intends to encourage women and scheduled castes/tribes to start businesses by providing bank loans ranging from 10 lakh INR (13,700 USD) to 1 crore INR (137,000 USD) to at least one SC/ST borrower and one woman borrower each Scheduled Commercial Bank branch. Loans are specifically available under this program to establish greenfield businesses in the manufacturing, trading, and service sectors.
- PMJJBY, Pradhan Mantri Jeevan Jyoti Bima Yojana (2015): The policy attempts to cover the uninsured, particularly the poor, by providing coverage for death due to any cause. The scheme provides a renewed one-year term life cover of 2 lakh INR (2,740 USD) to all subscribing bank holders. (aged 18-50). The scheme is run by LIC and other insurance companies that offer life insurance on similar terms and charge a yearly premium of only 330 INR (4.5 USD). As of July 2021, the scheme had enrolled 10.6 crore people, with 45.4% of them being women, with the total claim equal to 5154.8 crore INR (706 million USD).
- PMSBY, Pradhan Mantri Suraksha Bima Yojana (2015): The scheme provides all subscribing bank holders with a renewed one-year accidental death and disability cover (aged 18-70). A subscriber can get a claim of 2 lakh INR (2,740 USD) in case of death or total disability for 12 INR (0.16 INR) and a claim of 1 lakh INR (1,370 USD) in case of partial disability. PSGICs, Public Sector General Insurance Companies, and other insurance companies that propose to sell the product on similar terms are participating in this initiative. As of July 2021, the PMSBY system has a total enrolment of 24 crores, 45.8% of whom were women, with a total claim of 972.6 crore INR (133 million USD).
The Indian government has also launched the Atal Pension Yojana, which provides a monthly pension to eligible subscribers who are not covered by any organized pension scheme. And the Pradhan Mantri Vaya Vandana Yojana, which provides a monthly pension to eligible subscribers who are not covered by any organized pension scheme, offering protection to senior citizens from future interest rate shocks due to market uncertainties.
The Indian government has also introduced several programs under digitalization, including:
- JAM, Jan Dhan-Aadhaar-Mobile: By linking Jan Dhan bank accounts with Aadhaar and mobile numbers, the government hoped to build a digital infrastructure that it can use for a variety of purposes, such as transferring direct benefits, implementing pension schemes, facilitating credit flows, and promoting digital payments via ‘RuPay’ cards. DBT from the government under various initiatives has been made available to 8 crore accounts due to this initiative.
- Jan Dhan Darshak: The government hopes to use this smartphone application to assist individuals in finding and seeing banking touchpoints such as ATMs, bank branches, Bank Mitras, post offices, and CSCs, common services centers. Authorities are also using the tool to identify unbanked locations/villages with no banking touchpoints. The app will serve as a resource for citizens looking for financial service touchpoints in certain areas across the country. The app has mapped almost 8 lakh financial service touchpoints, according to the government.
Indian Government’s Plans Going Forward
It is critical to establish a digital infrastructure for multiple touchpoints, such as co-operative banks, payment banks, small finance banks, and offices of local government organizations and common service centers to provide universal financial services.
Furthermore, tailoring products and services to the target audience (for example, employing vernacular languages in mobile apps) can aid in the efficient delivery of a basic set of financial services.
In addition, by March 2024, the government intends to expand the scope of the CFL, ‘Centre for Financial Literacy’ program across the country at the block level to improve financial literacy among individuals (11). Furthermore, the NSFE, National Strategy for Financial Education 2020-2025 (12), aspires to integrate financial literacy subjects into school curricula, with 15 school boards including financial literacy subjects in their courses as of July 2021.
The government intends to promote and expand the financial inclusion process in the future by publishing the RBI’s FI-Index, which will be issued every year. The government will use this index to track annual progress and identify holes in the process.
Overall, India has made massive leaps in achieving financial inclusion, especially with innovations like UPI, IMPS, and AePS, which have revolutionized payments access. According to available reports (13), more than 280 crore INR worth of transactions were processed via UPI alone in June 2021, reflecting the digital payment adoption upswing across the nation amid the pandemic.
It is Still a Long Haul
While these numbers are encouraging, it is yet offer enough evidence of how access to bank accounts can trigger efficient decision-making by people and ultimately produce universal welfare effects.
Reportedly, households will transform from reactive units to deliberate goal-driven drivers of economic change to make better decisions. The important role of household decision-making in expressing welfare advantages is not recognized in current financial inclusion strategies.
Building this awareness necessitates a significant shift in policy makers’ perspectives on financial inclusion. Financial inclusion, we believe, is not the same as operational access to formal financial services. While access is the obvious initial step, financial inclusion is better seen as a process or a pathway by which households develop their ability for rational economic decision-making, which leads to improved welfare outcomes.
Surprisingly, the current policy position on financial inclusion is at odds with the viewpoint taken by fintechs. The fintech market in India is one of the world’s fastest-growing business areas. Fintechs are positioned to play a critical role in increasing financial inclusion in India, with a net investment of 2 billion USD in the first half of 2021 and an expected total sector valuation of 150-160 billion USD over the next five years (14, 15).
Fintechs are focusing on designing financial products and services, and they are also interested in seeing if the solutions they’re offering help households (users) make better decisions. However, the unique routes of change that relate financial access to decision-making and welfare improvements, and the specific product design components that can activate such pathways, are stumbling hurdles for them.
In short, with a series of government programs and technological breakthroughs such as smartphones and 4G internet penetration, India’s financial inclusion journey has taken off. It is now up to Indian businesses to take advantage of these characteristics and create products and services that promote affordable and convenient access to financial services. Startups also can serve the financially underserved rather than just the digitally sophisticated metropolitan customer base.
Leveraging Fintech Companies to Make India Financially Inclusive
Fintech startups have slowly but steadily begun to target India’s massive underserved population, and they are being provided with enormous opportunities in this regard.
With the help of smartphone ubiquity and internet usage, they’ve begun to move their focus from the digitally sophisticated metropolitan client base to the underserved. Thanks to a maturing environment, technological developments, and a friendly government posture, opportunities for startups are infinite.
Agri credit, rural insurance, digital microloans & SME lending, alternative credit scoring, supply chain finance, and last-mile banking services are some of the current focus areas of entrepreneurs in this space. It’ll only be a matter of time before these offerings have a tangible influence on people’s lives, and the companies are raised to ‘impact startups’ status (16, 17, 18).
However, there are still many challenges that India needs to address to help fintech companies scale and build a profitable business in the long term, including
- Regulatory Support
- Higher concentration on payments and lending
- Uncertain policies
- Capital, especially for early-stage startups
- The slower reaction of the ecosystem
So, how can India leverage fintech companies to achieve its financial inclusion goals? Below are recommended actions:
- As we mentioned, Financial inclusion initiatives have been superficial. However, With payments becoming increasingly digital, it may be time for authorities to focus their efforts on delivering savings, lending, and insurance products to underserved consumers and small companies. This could be accomplished by paying participants to share/exchange data based on consent to promote cash-flow-based lending/microinsurance products.
- Better collaborations between regulators and fintech companies
- Creation of policies aimed to incentivize market participants to build sustainable and profitable businesses
- More institutional early-stage funding to startups in wealth tech and neo banking that offers products and services around personal finance management, investments, and savings
- More focus on building profitable businesses via building differentiated value services
- Because banks and other regulated companies are such important parts of the FinTech ecosystem. They must devote greater resources, both people and money, to assuring technical preparedness to engage with the ecosystem. It will not only benefit the sector as a whole, but it will also help them compete with FinTech solutions that specifically target this weakness.
Financial inclusion will help promote financial stability and broaden India’s socio-economic progress. It will also allow traditional banking institutes and new-age startup companies to improve their business models, expand into the rural sector, and increase their cumulative customer base.
In other words, financial inclusion can minimize income inequality and benefit the impoverished and underserved by using technology and providing support through proper grievance redressal processes.