Financial Inclusion in India

Financial inclusion is an important vehicle to ensure sustainable and inclusive development.

Garima Singh
Published on: 25 Jan 2022 10:57 AM GMT
Financial Inclusion in India

Financial inclusion matters not only because it promotes growth, but because it helps ensure prosperity is widely shared. Access to financial services plays a critical role in lifting people out of poverty, in empowering women, and in helping governments deliver services to their people." -Sri Mulyani Indrawati

Financial inclusion is an antidote to poverty. "It is about (a) the broadening of financial services to those people who do not have access to the financial services sector; (b) the deepening of financial services for people who have minimal financial services; and (c) greater financial literacy and consumer protection so that those who are offered the products can make appropriate choices" (Raghuram Rajan). It is an important vehicle to ensure sustainable and inclusive development. At the micro-level, it aids in poverty reduction, increased employment and savings, and individual empowerment. At the macro level, it enables economic growth, enhances financial stability by reducing vulnerability to economic shocks, and ensures social cohesion.

An inclusive financial system multiplies overall economic output while reducing poverty and income inequality on a national scale. It supports stability, integrity, and equitable growth and is an important vehicle to promote gender equality and women's empowerment.

The financial inclusion of India can be measured by the Financial Inclusion Index, published by the Reserve Bank of India. It reflects the state of financial involvement in the country, India. The index is based on three broad parameters, weighted as follows:

Ease of access (35%),

Availability and usage of service (45%) and

Quality of service (20%).

The index has been constructed without any "base year" and thus reflects financial inclusion in absolute terms, where 100 would mean complete inclusion. As per RBI's Report 2021, the FI Index stood at 53.9.

Financial Inclusion – Evolution through the years

The journey towards Financial Inclusion

1969- The Nationalization of 14 commercial banks

1971- Priority sector lending

1975- Establishment of Regional Rural Banks.

1980- The second round Nationalization of 6 more commercial banks

1982- Establishment of National Bank for Agriculture and Rural Development.

2014- PM Jan Dhan Yojana

PM- JAM trinity

Though many initiatives were taken, the most transformational of all was the PM-JAM, i.e., the Pradhan Mantri-Jan Dhan Yojana (PM-JDY) in conjunction with Aadhar and mobile phones in 2014 by the government of India, to ensure universal access to various financial services for every individual at an affordable cost, whereby zero balance accounts were opened in a simplified manner through the use of Aadhar cards and mobile phones.

The use of Aadhar and its combination with the digital infrastructure has not only allowed for widespread banking coverage in rural areas but has also resulted in a reduced cash component of GDP. This initiative has helped in empowering citizens by cutting out the middle man and directly reaching the recipients, thus avoiding any kind of leakage or exploitation.

The National Strategy of Financial Inclusion 2019–2024 and the National Strategy of Financial Education 2020–2025 provide a framework for a coordinated approach to financial inclusion, financial literacy, and consumer protection to attain comprehensive inclusion.

Present scenario

According to the World Bank's Global Findex Report 2017, 80% of eligible Indians had a bank account. However, 48% of these accounts were inactive and had not seen a single transaction.

According to the official Jan Dhan Yojana website, as of December 2021, there were 44.23 crore bank accounts. Out of these, 24.61 per cent were female beneficiaries.

The annual FI-Index for the period ended March 2021 was 53.9, as against 43.4 for the period ended March 2017.

Digital transfer across India via 319 government schemes spread over 54 ministries was Rs 5.53 lakh crores in FY21.

Covid 19 and Financial Inclusion:

The lockdown as a result of COVID 19 has hit the economy and has pushed much back into poverty. On the way to attaining financial resiliency, several new complexities and challenges have arisen. However, these challenges have also highlighted the importance of universal financial access as it was only through the existing financial infrastructure that stimulus packages were provided to the vulnerable and needy seamlessly and effectively without any leakages. The pandemic has also resulted in the increased adoption of digital payments. Other than that, RBI has also taken policy measures to ease the flow of credit to needy segments and MSMEs.


Financial Dormancy: India has the highest number of inactive bank accounts (48%) and the second-highest number of unbanked people.

Misuse of accounts: Jan Dhan accounts were misused to launder black money during the demonetization.

Trust deficit: Due to the rising cases of bank fraud, there is a lack of trust and confidence in the banking system among many citizens.

Financial Outreach: There is a lack of awareness among people about schemes and benefits, leading to less willingness to be involved in the formal sector.

Way ahead

Financial awareness program: The financial awareness programmes by various institutions like SEBI, RBI, etc., should be synchronized to encourage financial education and empowerment.

Financial products and self-help groups: Creating an environment that enables the use of formal services by the creation of simpler, cheaper, and easier products and by encouraging self-help groups as information as well as delivery agents

Credit Rationalization: There is a need to reorganize the credit mechanism in the bank to make it easily accessible and fairer to all.

Waging Tech Points: Tracking tech points and overcoming the digital divide.

Attitudinal shift: Inculcating trust and bringing attitudinal change among people by using behavioral interventions to achieve active financial involvement.

Mapping government schemes: Focus should be given towards mapping various government schemes and delivering them directly to beneficiaries by way of direct benefit transfer.

In the past decades, India has made significant strides towards financial inclusion, especially with schemes like JAM, which have proved to be very beneficial in enhancing the countrywide network of formal financial services. IMF and World Bank have also recognized governments slew of measures. However, considering the population and potential of India, there is a requirement for continuous innovative and inclusive programmes to bring the eligible population within the ambit of the formal financial sector to realise the dream of a credible and competitive cashless economy. As described by Shaktikanta Das, "we must continue our efforts for greater financial inclusion in pursuance of the goal of sustainable future for all". It will happen not just through mandates but by changing the environment by making financial inclusion attractive to service providers as well.

Garima Singh

Garima Singh

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