UPSC MAINS 2019: Financial inclusion is fast losing steam

Financial inclusion is fast losing steam


Topic: Financial inclusion is fast losing steam

Topic in Syllabus: GS Paper 3: Indian Economy


Financial inclusion is fast losing steam


The recent Report on Trend and Progress of Banking in India 2017-18 points out some early signs of slowdown in financial inclusion (FI) efforts.



  • 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.
  • 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.
  • 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.


Meaning of financial inclusion:

  • Financial inclusion may be 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 (The Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan).
  • Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products (The Committee on Financial Sector Reforms, Chairman: Dr.Raghuram G. Rajan).
  • The essence of financial inclusion is to ensure delivery of financial services which include – bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, insurance facilities (life and non-life) etc.


Why Financial Inclusion?

  • Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segment of rural population and plays its own role in the process of economic development.
  • Further, by bringing low income groups within the perimeter of formal banking sector; financial inclusion protects their financial wealth and other resources in exigent circumstances. Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.
  • In rural areas, the Gini’s coefficient rose to 0.28 in 2011-12 from 0.26 in 2004-05 and during the same period to an all-time high of 0.37 from 0.35 in urban areas.


Extent of Financial Exclusion

  • the extent of financial exclusion from different perspectives / angularities is presented based on five different data sources viz.:
  • NSSO 59th Round Survey Results
  • Government of India Population Census 2011
  • CRISIL – Inclusix
  • RBI Working Paper Series Study on ‘Financial Inclusion in India: A Case-study of West Bengal’ and
  • IMF ‘Financial Access Survey’ Results


Present status of Financial Inclusion in India

Progress of financial inclusion, since the launch of financial inclusion plans, clearly indicates that banks are progressing in areas like opening of banking outlets, deploying BCs, opening of no-frill accounts, grant of credit through Kisan Credit Cards and General-purpose Credit Cards. In more specific terms following are some of the achievements of financial inclusion plans-

  • Due to RBI’s concerted efforts since 2005, the number of branches of Scheduled Commercial Banks increased manifold from March 2006 to March 2013, spread across length and breadth of the country.
  • The number of banking outlets in villages with population more than 2000 as well as less than 2000 increased consistently since March 2010.
  • The number of no-frill accounts opened increased to about 2.5 times from March 2010 to March 2013.

India's progress on financial inclusion


Benefits of Financial inclusion:

  • It paves the way for establishment of an account relationship which helps the poor to avail a variety of savings products and loan products for housing, consumption, etc.
  • An inclusive financial system facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital.
  • This also enables the customer to remit funds at low cost. The government can utilize such bank accounts for social security services like health and calamity insurance under various schemes for disadvantaged. From the bank’s point of view, having such social security cover makes the financing of such persons less risky. Reduced risk means more flow of funds at better rates.
  • Access to appropriate financial services can significantly improve the day-today management of finances. For example, bills for daily utilities (municipality, water, electricity, telephone) can be more easily paid by using cheques or through internet banking, rather than standing in the queue in the offices of the service.
  • Transfer of money can be done more safely and easily by using the cheque, demand draft or through internet banking.
  • A bank account also provides a passport to a range of other financial products and services such as short term credit facilities, overdraft facilities and credit card. Further, a number of other financial products, such as insurance and pension products, necessarily require the access to a bank account.
  • Lastly, the Employment Guarantee Scheme of the Government which is being rolled out in200 districts in the country would bring in large number of people through their savings accounts into the banking system.


Financial inclusion measures in India:


Following are the main financial inclusion measures and programmes launched in India.


  1. The basic banking account or Basic Savings Bank Deposit Account (BSBDA):
  • This is the bank account with a minimum bouquet of services including savings and payments given to the financially excluded people that.
  • The BSBDA account has replaced the previous no frills (zero balance) account.
  • Minimum bouquet of products and services were offered under BSBDA and they include:
  • A savings cum overdraft account
  • A pure savings account, ideally a recurring or variable recurring deposit
  • A remittance product to facilitate EBT and other remittances, and
  • Entrepreneurial credit products like a GCC or a KCC


  1. Simplified KYC norms:
  • The RBI has simplified KYC regulations especially for small value clients and transactions.
  • This is because in a country like India where documents and identity proof are not with many, it is very difficult to attract them to stricter KYC standards.
  • Hence essential and basic level identities are needed under this simplified KYC regime.


  1. Liberalized policy towards ATMs and White label ATMs:
  • To expand the network of ATMs, the RBI has allowed non-bank entities to start ATMs (called ‘White Label ATMs’).


  1. Adoption of Business Correspondents (BCs):
  • BCs were allowed to provide banking services in rural areas.


  1. Promotion of technology-based instruments for spreading banking services:
  • Several technologies based solutions were initiated by the RBI to promote financial inclusion.
  • These include incentivizing banks to issue smart cards and ATM cards etc, supporting internet banking and mobile banking with regulatory measures.
  • Business Correspondents have to use ICT while delivering products in remote areas.


  1. Promotion of Payment infrastructure including pre-paid instruments:
  • Technological development has transformed payment operations.
  • Payments are essential banking services. Here, the RBI itself has the NEFT and RTGS.
  • Banks and Non-Bank entities like telecom companies are allowed to issue prepaid instruments like mobile wallet etc.


  1. RuPay debit cards were launched in 2012 by NPCI:
  • “RuPay” is the coinage of two terms Rupee and Payment.
  • The RuPay Cards have significantly increased its market share to 38 per cent (250 mn) of the total 645 million debit cards in the country so far.
  • The card has been provided to the account holders of PMJDY (170 million).


  1. Financial Literacy Programme:
  • Financial Literacy Centers were started by commercial banks at the request of RBI to give awareness and education to the public to access financial products.
  • Here, RBI’s policy is that financial inclusion should go along with financial literacy. RBI provides support to Financial Literacy and Credit Counselling Centres (FLCCs).


  1. Financial Inclusion Plan for the expansion of branch and branchless banking:
  • Commercial banks have launched FIP to provide banking services to remote areas.


  1. Liberalized branch license scheme:
  • the RBI has launched this step in December 2009.
  • Here, 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 subject to reporting.
  • In north-eastern states and Sikkim, domestic scheduled commercial banks can now open branches in rural, semi-urban and urban centres with the same liberalized procedure. Similarly, banks were asked open at least 25 per cent of the total number of branches in unbanked rural centres.


  1. Kisan Credit Cards (KCC) and General Credit Cards (GCC):
  • Kisan Credit Cards were issued to small farmers to get hassle free credit from banks.
  • Issue of credit cards to the credit needy people was another component of the RBI’s financial inclusion drive.
  • Under GCC, banks have been asked to introduce general purpose credit card facility up to Rs 25,000 at their rural and semi-urban branches for low-income people.
  • The objective of the scheme is to provide hassle-free credit to customers based on the assessment of cash flow without insistence on security, purpose or end-use of the credit.


  1. Bank -SHG linkage programme
  2. Aadhaar enabled payment system


  1. Direct Benefit Transfer (DBT):
  • The launch of direct benefit transfers through the support of Aadhaar and Bank Account is one of the biggest development that activated and retained people in the newly opened account.


  1. PMJDY: Pradhan Mantri Jan Dhan Yojana
  2. EBT: RBI has encouraged Electronic Benefit Transfer for routing social security payments through the banking channel.


  1. Unified Payments Interface:
  • UPI is a payment mechanism built by the NPCI to promote online money transactions. It is aimed to facilitate retail payments for ecommerce, small ticket money transfers for person to person payment, micropayments, utility bill payments etc.
  • Purchase of tickets, payment of school fees, etc. can be easily carried out by the interface rather than submitting the bank details while executing the transaction.


  1. BHIM App


Barriers to Financial Inclusion:

The census report, 2011 shows that 41.3 percent of the Indian population in urban and rural areas do not have access to banking facilities. The following are the main barriers that hinder the financial inclusion movement in India. They are:


Remoteness from the financial institutions:

  • Usually, banks are locating its branches in the high densely populated areas for covering its cost of operations. Unfortunately, people are scattered in rural India.
  • The population densities of rural areas are very low. The remoteness of the financial institution makes rural people do not utilize such services.
  • They have to travel far to approach these institutions which is again a time and cost consuming process.


Financial Illiteracy:

  • Most of the people suffer from financial stress due to lack of financial literacy.
  • Financial literacy teaches the vulnerability of the investments and loans given by the informal financial institutions.
  • It also gives clarity about the formal financial institutions and its merits.


Low and Irregular income:

  • Income level is one of the prominent factors that hinder the underprivileged from availing services from banks.
  • Majority of the people’s income level in the rural area is low and irregular too. A major portion of people is in seasonal employment.
  • Hence, income level decides the people’s saving and investment avenues.


Inappropriate products:

  • Generally, banks are targeting educated and a high-income group of people.
  • They develop financial products based on these target groups’ requirements.
  • The needs of low income and weaker section of people are quite different.
  • This increases the percentage of financially excluded people in the society.


High Cost:

  • Nowadays banks are operating for profit under the competitive environment.
  • They levy charges for different transactions like minimum balance requirement, charges for usage of ATM services, processing fee etc.
  • People are already suffering from low and irregular income. Therefore paying these kinds of excessive charges make them more burdened.


The attitude of employees:

  • Employees of the formal financial institutions give differential treatments to dissimilar target groups.
  • The highincome group receives overwhelming response whereas low income and rural people suffer from bitter experiences. 
  • This affects the self-respect and dignity of the people and hampers the financial inclusion process.


Lack of proper Documents:

  • As per norms of the banks, it is mandatory to submit legal documents at the time of opening an account. Majority of the poor people like migrants, tribes etc cannot access the formal financial services due to lack of having any legal documents.
  • Getting legal document is an expensive and time-consuming process


Way forward:

RBI and Government as part of their development role, NABARD, which is spearheading this programme, and banks who are the main promoters of the program, may initiate the following effective steps to overcome these shortcomings:


  • Promotion of Federation structure: The long term sustainability of the SHG model may require a federal structure, without severing the linkages that the SHGs have with the local bank branches. The assumption that the federation structure should not be supplanted on the SHGs and can be addressed when the demand emerges needs reconsideration.
  • Maintenance of National Database on SHGs and MFIs: At present, NABARD is maintaining the database on SHGs. It publishes annual hand book on microfinance in India with focus only on SHG Bank linkage programme. It is suggested that NABARD be assigned the responsibility of collection of data involving the entire sector, their compilation and dissemination.
  • Comprehensive regulatory framework: Presently, there is no distinctive regulatory framework for the MFIs in India. Therefore, there is a need of an exclusive regulation to regulate MFIs in India.
  • Contribution to the MFDEF (Micro Finance Development and Equity Fund) by Banks: The corpus may be built up on an ongoing basis. A portion of profits of the bank may be contributed to the fund. The Government may provide tax relief to Banks for the contributions made.
  • An integrated package of services (‘a credit-plus’ approach) rather than just providing credits: When access to credit is combined with savings facilities, non-productive loan facilities, insurance, enterprise development and welfare-related services, the adverse effects discussed above can be diminished.
  • Role of Corporate in Micro Finance: Corporate India, of late, shown keen interest in the SHG movement as it provides an alternative business opportunity for them besides being a means to actualize its corporate social responsibility objectives.


Sample Question:

What do you understand by financial inclusion? Discuss the barriers for financial inclusion? Enumerate the financial inclusion steps by Government?