Financial Inclusion - Challenges and Opportunities

It has been more than a decade since our apex bank, Reserve Bank of India (RBI) set up Khan Commission to recommend ways and means to increase financial inclusion to deliver financial services and products at affordable costs to large sections of low income groups. After receiving the commission’s report in 2005, RBI started building pressure on banks and other financial institutions to take measures such as opening of zero balance accounts to include vast sections of people in rural and semi urban areas in the formal banking sector, insurance, and pension domains.

However, it was only after Narendra Modi took charge in the Centre that the requisite political push was given to financial inclusion with the launch of the Pradhan Mantri Jan Dhan Yojna (PMJDY) in 2014, and other schemes such Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana subsequently. 

While these efforts have shown results in the recent past, several challenges still persist that can be tackled by combined efforts of all stakeholders.

Status of Financial Inclusion

But before we discuss the challenges, let us see the current status of the financial inclusion in India. A PwC India report prepared for the Internet and Mobile Association of India (IAMAI) and Payments Council of India (PCI) in October 2015 estimated that the country’s unbanked population more than halved to 233 million in 2015 from 557 million in 2011.

A bulk of this fall - 182 million - came in 2014, the year when Pradhan Mantri Jan Dhan Yojana (PMJDY), aimed at ensuring a bank account for every Indian household, was launched. This significant achievement was, however, accompanied by some pain points: more than 20% of the accounts opened belonged to individuals who already had savings bank accounts in other banks – something not allowed under the scheme -- and about 40% of the new accounts opened, carried zero balance.

Insurance is another critical area for financial inclusion, but, according to ASSOCHAM, these services reach less than 4% of the total population of India. The BPL population, which is more than 22% of the total population of India, is the most vulnerable segment that needs insurance facilities at affordable prices to cope with financial uncertainties, including those caused by natural calamities.

Over the past few years, it has been noted that insurance is important not only for reducing poverty, but also for enabling people at large to manage their financial risks and avoid relapsing into poverty.

Technological advancements over the past several years have helped insurance companies come up with better products, and easier ways to sell them to a larger population at affordable prices. These developments have thus helped financial inclusion in a significant way.

Challenges:

Providing financial services in India where, despite commendable economic growth over the past several years, close to 30% people are still illiterate, is indeed a big challenge. And when you combine illiteracy with poverty, the task becomes even more difficult.

Banks, both private and public, have, however, worked out ways to tackle challenges arising out of illiteracy by ensuring biometric access to bank accounts. However, integration of Aadhaar card entails that some data has still to be fed in the machine to operate an account. But since all the data is in English, and the messages that are received on mobile phones from banks are also in English, many people cannot operate their accounts and have to depend on the bank employees or the business correspondent (BC) to be able to take advantage of banking facilities. And that has been the reason for many frauds that have come to surface in the recent past, especially after demonetisation.

Business Correspondents have also been found giving the same Personal Identification Number (PIN) to all the residents in a single village, perhaps in order to meet targets or out of sheer laziness. The developments like these may become the reason for many illiterates to go back to the traditional sources of loans like moneylenders.

Opportunities

More than 70% of India’s population is estimated to be living in villages, and a large segment of it confronts financial difficulty mainly due to lack of savings. Availability of formal banking and insurance services and products at affordable costs in rural India will encourage people to save and keep away from traditional ways of parking their savings in gold and land.

A substantial part of our rural population depends on unreliable channels of credit like moneylenders. With entry level smartphone pricing becoming more affordable for nearly everyone, the avenues of availability of credible and transparent credit through mobile banking channels will only reduce the vulnerability of the rural people to financial uncertainty. As well, it will encourage the unbanked population to use formal banking channels to account their money running in small businesses. This will only contribute in brining economic sustainability in rural areas in the years to come.

Rajiv Gandhi had famously said that only 15 paise of every rupee meant for welfare of downtrodden reaches them. That is why the government is pushing for direct cash transfers to beneficiaries’ bank accounts instead of giving subsidies or cash. Financial technology and digitisation has, of course, come handy in the efforts.

Financial inclusion is not only to help ameliorate the bottom of pyramid sections of our society, but also to give impetus to prosperity, particularly in areas that have been deprived of development despite accelerated economic growth over the past three decades.