financial-inclusion-in-india

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

  • Financial inclusion is a method of offering banking and financial services to individuals. 
  • It aims to include everybody in society by giving them basic financial services regardless of their income or savings. It focuses on providing financial solutions to the economically underprivileged. 

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

Why is financial inclusion important?

  • Financial inclusion is among the most critical objectives for long-term equitable growth and a financially-stable economy. 
  • A country where a large proportion of its population is excluded from the financial sector, as it currently is in India, is not only not equitable but will also have a relatively weak financial sector. 
  • Financial inclusion strengthens the availability of economic resources and builds the concept of savings among the poor
  • Financial inclusion is a major step towards inclusive growth. 
  • It helps in the overall economic development of the underprivileged population
  • In India, effective financial inclusion is needed for the uplift of the poor and disadvantaged people by providing them with the modified financial products and services.

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. 

Way forward:

  • RBI should disclose details of the indicators it 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 indicators to 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 implementing the 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.

It is important that financial inclusion data be as granular geographically as possible. Without a spotlight on current gaps, financial service providers have little incentive to frame solutions with appropriate gender-lens.The purpose of any data or index is to offer us pointers on moving ahead. For meaningful financial inclusion, we must have meaningful metrics in the public domain.

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