Context: 

• The Reserve Bank of India (RBI) announced the formation of a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country.

 

Key points:

• The index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with the government and respective sectoral regulators.
• The annual FI-Index for the period ended March 2021 stood at 53.9 compared with 43.4 for the period ended March 2017. 
• The FI-Index will be published in July every year.
• FI-Index comprises three broad parameters (weights indicated in brackets):
  • Access (35%), 
  • Usage (45%), and 
  • Quality (20%) 
• Of the three categories, Access, Usage and Quality, there has been more progress on Access, with Usage lagging the most. 
• The index is responsive to ease of access, availability and usage of services, and quality of services for all 97 indicators.
• The FI-Index has been constructed without any ‘base year’ and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion
• The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.
• A unique feature of the index is the parameter related to the quality of financial inclusion as reflected by financial literacy, consumer protection, and inequalities and deficiencies in services.
  • As the index looks beyond just banking services to include insurance, pension and digital payments, the approach taken for financial inclusion is broader than mapping progress under Financial Inclusion Plans. 

 

Shortcomings of the index:

• Less information: Just two numbers were announced: the index stood at 53.9 for the period ending March 2021, as against 43.4 for the period ending March 2017. 
  • Though the 97 indicators used have not been listed in this note, inequality at the district level is being mapped as one indicator of Quality.
• Lack of relevant data: There has been a high dependence on surveys, with the World Bank Findex and Financial Inclusion Insights data giving us some idea of trends in access and usage every two years or so. 

 

Financial Inclusion Initiatives

Jan Dhan-Aadhar-Mobile (JAM) Trinity

• The combination of Aadhaar, PMJDY, and a surge in mobile communication has reshaped the way citizens access government services.
• As per the estimates in March 2020, the total number of beneficiaries under Jan Dhan scheme have been more than 380 million.
• By significantly changing the concept of individual identity, Aadhaar has not only brought about a secure and easily verifiable system but also easy to obtain as well to help in the financial inclusion process.
• The government has also launched many flagship schemes to promote financial inclusion and provide financial security to empower the poor and unbanked in the country.

• These include the Pradhan Mantri Mudra Yojana, Stand-Up India Scheme, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and Atal Pension Yojana.

 

Objectives of financial inclusion: The objectives of financial inclusion are to provide the following:

• A basic no-frills banking account for making and receiving payments
• Saving products (including investment and pension)
• Simple credit products and overdrafts linked with no-frills accounts
• Remittance, or money transfer facilities
• Micro insurance (life) and non-micro insurance (life and non-life)
• Micro pension

 

ADVANTAGES  OF FINANCIAL INCLUSION

• Reduce the gap between rich and poor people
• Boosts the financial condition and standards of life of the poor and disadvantaged population.
• Help in implementing social security schemes
• Lowers the transaction cost for daily economic activity.
• Enables creation of economic buffers for exigencies
• Better monitoring and regulation of financial transaction using digital technology
• Helps government plug leakage in public subsidies and welfare programmes as govt. can directly transfers the subsidy amount into the account of beneficiary.
• Poor and downtrodden are encouraged to invest in various financial products and can borrow from formal financial channels.
• Increases the amount of available savings, rate of capital formation and thereby allows tapping of new business opportunities.
• g. PMJDY, Mudra loans, Atal Pension Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana and Stand-up India

 

COST OF FINANCIAL EXCLUSION

• The more a country is financialized, the more people who have no access to financial products face difficulties and will suffer from important financial, economic and social consequences.
• Accepting a job can be more difficult, if there is widespread financial exclusion, as most employers insist on paying wages electronically into an account.
• Getting access to other financial products (insurance, credit) may depend on being able to pay by direct debit and not having a bank account also reduces credit scores.
• In the face of widespread financial exclusion, for the affected people the only option in times of need is illegal lenders. Such lenders apply default charges that can be extortionate and arbitrary – vicious cycle of perpetual indebtedness sets in.
• People who save informally (that is not in a bank account) do not benefit from the interest rates and tax advantages that people with savings accounts enjoy. Savings kept in cash at home are vulnerable to theft.
• If the SMEs sector, are affected by financial exclusion then their potential contribution to the overall economic growth is severely hampered. Further, given the fact that about two-third of the units in this sector are owned by the disadvantaged section, such an exclusion results into a form of social injustice.
• 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.
• Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.

 

Schemes for financial inclusion

• Opening of Pradhan Mantri Jan Dhan Yojana accounts has enabled millions to have access to financial services. This has addressed the supply side issue to a considerable extent.
• Six years after its implementation, the total number of accounts opened under Jan Dhan Yojana has touched 41.4 crore, with deposits adding up to Rs 1.30 lakh crore as on December 2 last year. 
• Other than PMJDY, there are several other financial inclusion schemes in India — Jeevan Suraksha Bandhan Yojana, Pradhan Mantri Vaya Vandana Yojana, Pradhan Mantri Mudra Yojana, Stand Up India scheme, Venture Capital Fund for Scheduled Castes under the social-sector initiatives, Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension Yojana (APY), Varishtha Pension Bima Yojana (VPBY), Credit Enhancement Guarantee Scheme (CEGS) for scheduled castes, and Sukanya Samriddhi Yojana.
• Digital identity (Aadhaar), along with the proliferation of mobile phones with new payment systems, have addressed the first two challenges of access and usage to a large extent. The third challenge, i.e. quality, requires both demand and supply side interventions. 

 

Current state of financial inclusion in India

• A significant segment of the country is still financially excluded, according to the Reserve Bank of India’s first composite Financial Inclusion Index (FI-Index) unveiled Tuesday, which seeks to capture extent of financial inclusion across the country.
• The FI-Index of 53.9 for 2020-21 indicates that 46.1 per cent of the parameters considered are still financially excluded, despite the launch of the Pradhan Mantri Jan Dhan Yojana for unbanked sections of society, digital payment revolution and entry of a host of players in the insurance and mutual fund segments over the last couple of years. 

 

What are the challenges to financial inclusion in India?

1. Illiteracy – In India, where nearly 1/4th of the population is illiterate and below the poverty line. Thus ensuring financial inclusion is a challenge.
2. Low income and the inability to provide collateral security.
3. Lack of enough bank branches in rural areas continues to be the roadblock to financial inclusion.
4. More reliance on informal lending.
5. Difficulty in understanding different product offerings, financial terms, and conditions.
6. A lot of hidden bank charges have demotivated poor persons from availing financial services.
7. Low-income groups don’t see banks as welcoming and often believe they are not for them.
8. Lack of credible, low-cost and high-quality financial advice.
9. Most women are being excluded from the formal financial system.
10. Disabled people find it difficult to access banks.
11. The rising level of Non-Performing Assets (NPAs) of banks due to the large corporates makes it difficult to improve financial inclusion situation in India.

 

Way forward:

• RBI should disclose details of the indicatorsit has used for each of the three categories, Access, Usage and Quality.
• Include data on active/dormant agents, usage of accounts, the quality of service/transactions, etc.
• We need district-level data on all indicatorsto understand where additional support is needed.
• We need a breakup across all categories for gender at the district level. India had pledged to close the gender gap in financial inclusion by implementingthe Denarau Action Plan adopted in Fiji at the 2016 Global Policy Forum.
  • The first step towards this would lie in generating gender-wise data on financial services. 
  • For instance, we do not know the number of active women business correspondents in each district, or how actively women customers use their bank accounts.