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Chapter # 8. Financial Inclusion


  • Banking for the unbanked

 o Bank accounts: Ensuring universal access to bank accounts, which are a gateway to all financial services.

 o Digital payment services: Providing access to digital payment services and increasing its penetration.

 Securing the unsecured

 o Insurance and social security: Ensuring universal coverage of insurance for life, accidents, etc., and of pensions and other retirement planning services.

 o Asset diversification: Allowing diversification of asset portfolio of households through increased participation in capital markets.

 Better access to credit at a reasonable cost for those presently excluded

Current Situation

The government has 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 Jan Dhan Yojana, Pradhan Mantri Mudra Yojana, Stand-Up India Scheme, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and Atal Pension Yojana. In addition, the promotion of Aadhaar and direct benefit transfer schemes facilitate financial inclusion.

These schemes have led to significant progress. According to World Bank data, in 2014, 53 per cent of adults had a bank account. This increased to 80 per cent in 2017, which is now comparable to China.1 Many recent independent studies have documented the increased ownership and active use of bank accounts because of the Jan Dhan scheme.2 There has also been an increase in the penetration of low cost insurance schemes and pension schemes. Even as the importance of financial assets is increasing for Indian households, physical assets continue to be the predominant asset class for savings for them.

Awareness and use of mobile payments in India had been low. In 2016, the percentage of the population using mobile money services in India was only 1 per cent, compared to Bangladesh (40 per cent), Pakistan (9 per cent), Kenya (81 per cent) and Tanzania (61 per cent).3 Many of these models in other countries have been driven by non-banking providers such as telecommunication companies, using modes of communication such as Unstructured Supplementary Service Data (USSD). However, after demonetization and the launch of the BHIM platform, penetration of mobile payments has improved. Several new initiatives such as Aadhaar-enabled payment services, payment banks, etc. will boost the use of mobile payments.

In terms of credit access, India has considerable ground to make up. In 2016, the number of loan accounts per 1,000 adults was 154 in India. In comparison, the number of loan accounts per 1,000 adults was 88 in Bangladesh, 26 in Pakistan, 417 in South Africa, and 231 in Kenya. Similarly, bank credit to GDP ratio in India is 51 per cent, as compared to 98 per cent in China in 2016.4


  1. Lack of financial literacy amongst low income households and small informal businesses.
  2. The high cost of operations of the traditional banking model.
  3. Excessive regulatory requirements on products, and market entry, and conservative regulatory approach to new technologies.

Way Forward

  1. Launching a new scheme for comprehensive financial literacy
  • An Arthik Shiksha Abhiyan will help improve financial literacy and may be integrated in the regular school curriculum. Besides, efforts to improve financial literacy should be complemented by mass media campaigns to provide information on financial products and their use.
  1. Assess the performance of banking correspondents and give better incentives
  • Given the infeasibility of locating branches in every nook and corner of the country, bank correspondents are used to reach out to prospective clients. However, an inadequate compensation structure makes correspondent banking unattractive. The issue of inadequate training is being addressed by the RBI which has developed a framework for certification for both basic and advanced levels. There is also a need to create better monetary incentives for banking correspondents as well as to provide them better training.
  1. Facilitating growth of online and paperless banking
  • Paperless banking will reduce friction, documentation proof requirements and the cost of banking services. This, in turn, will bring a larger proportion of the population within the ambit of the formal financial system. The following actions are required on the policy front:
  • Ease transaction limits for e-KYC based deposit and loan accounts.
  • Push digital signature for loan accounts by asking public sector banks to carry out at least 25% of their transactions through paperless accounts by 2022-23.
  • Expand digilocker services by including more issuers of documents.
  1. Using technology to improve the assessment of credit-worthiness for households and informal businesses
  • One of the main constraints in providing low-in-come households and informal businesses is the lack of information available with formal creditors to determine their credit worthiness. This results in high cost of credit. This constraint can be over-come by the adoption of appropriate technology.
  • Create a new data-sharing framework that builds on the success of Jan Dhan and Aadhaar platforms to enable easier access to credit, with adequate safeguards for maintaining data privacy.
  • Existing gaps in land records such as transfers of ancestral properties, conversion to free hold, regularization of colonies, extension of limited tenure pattas, etc., need to be filled. In addition, a central land holding register could be prepared and maintained in a digital format.

In addition to greater digitization, there is also a need to strengthen cyber security in the country. A common cyber security framework across different stakeholders should be created.

  1. Leverage payment banks and other platforms to scale up payments systems in underserved areas
  • Post offices are familiar sights in all villages. Payment banks, including the India Post Payment Bank, can potentially revolutionize the payments system like telecom companies did in Africa and other South Asian countries, with innovative products like mobile money.
  • A flexible and proactive approach towards regulations on payment banks, such as regulations on minimum capital requirements, transaction amounts, and restriction on investments, should be adopted to ensure that the payment bank model becomes commercially viable and scalable.
  • Payments through the USSD channel have an advantage over the internet in that it can also cover a large proportion of non-smartphone users. This has been the experience from the successful scale up of payments systems in many African countries. In India, USSD can be particularly useful in rural areas where some segments still do not have reliable access to the internet. Thus, the USSD channel should be promoted for government and non-government payment platforms. Further, fee on failed USSD transactions should be refunded to consumers to enable greater participation.
  1. Overhaul the regulatory framework governing formal financial products to attract households
  • Household acceptance of formal financial products, such as insurance, equity, etc., can be increased if regulations governing these are simplified and made more consumer-friendly.
  • Instances of mis-selling of financial products to households needs to be tackled by overhauling the regulatory framework. Disclosure requirements for insurance and pension products need to be strengthened to make it easier for consumers to understand them.
  • Simplification and relaxation of insurance sector regulations – Substantial simplification of broker regulations can be made. Further, restrictions on payment of incentives and bonuses to agents in insurance can be removed.
  • KYC restrictions in the capital markets can be eased and linked to other KYC information to enable ease of doing business and increase the participation of retail investors.
  • The lock-in period for gold bonds should be reduced to make them more attractive.

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