Editorial Articles

Issue no 2, 09 - 15 April 2022

Accelerating Financial Inclusion in India Status, Challenges and Way Forward

Manjula Wadhwa

Seven of the seventeen United Nations Sustainable Development Goals (SDG) of 2030 view Financial Inclusion as a key enabler for achieving sustainable development worldwide by improving the quality of lives of poor and marginalized sections of the society. Assimilating this universal truth, countries across the globe, including India, have developed suitable strategies and policies to increase access and usage of formal financial services. According to the annual Financial Inclusion Index (FII) computed by RBI for 2020-21, the FII stood at 53.9 as compared to 43.4 for 2017 registering a compound annual growth rate (CAGR) of 5.5 per cent.


Financial Inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. These include bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, insurance, overdraft and pension facilities etc.


Financial Inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over. Access to formal finance can boost job creation, reduce vulnerability to economic shocks and increase investments in human capital. Without adequate access to formal financial services, individuals and firms need to rely on their own limited resources or rely on costly informal sources of finance to meet their financial needs and pursue growth opportunities. At a macro level, greater financial inclusion can support sustainable and inclusive socio-economic growth for all. There has been growing evidence on how financial inclusion has a multiplier effect in boosting overall economic output, reducing poverty and income inequality at the national level. Financial inclusion of women is particularly important for gender equality and women's economic empowerment. An inclusive financial system supports stability, integrity and equitable growth. Therefore, financial exclusion because of several barriers like physical, socio-cultural and psychological, warrants attention from the policy makers.


Financial Inclusion initiatives in India started in the aftermath of first All India Rural Credit Survey in 1954 with promotion of cooperatives, followed later by the nationalization of Life Insurance companies in 1956, banks in 1969 and 1980 and nationalization of General Insurance companies in 1972. The mission got further impetus with the expansion of branch network after nationalization of major private sector banks, launch of Lead Bank Scheme promotion of Self Help Groups (SHGs), Joint Liability Groups (JLGs), implementation of Banking Correspondents (BC) model, expansion of banking outlets, creation of payments banks, small finance banks, etc. However, the real thrust on financial inclusion came in 2005 when Reserve Bank of India highlighted its significance in its annual policy statement of 2005-06. It urged banks to work towards reaching out to the masses, offering banking services down to the hinterland. Financial Inclusion as a policy initiative entered the banking lexicon only after recommendations of the Rangarajan Committee in 2008 with RBI advising all public and private banks to submit a board-approved, three-year FI plan (FIP) starting from April 2010, broadly including self-set targets in terms of rural branches, coverage of unbanked villages with population above 2,000 and those with population below 2,000; deployment of Business Correspondents and Facilitators, use of electronic/ kiosk modes for provision of financial services; opening of no-frills accounts etc. For dispensation of credit, Kisan Credit Cards, General Credit Cards, designed to cater to the financially excluded segments, were introduced. Further, banks were advised to integrate FIPs with their business plans and to include the criteria on FI as a parameter in the performance evaluation metrics of their staff. Different approaches adopted by RBI towards achieving financial inclusion are as under:-


Pradhan Mantri Jan Dhan Yojana (PMJDY) - The historic shift in Financial Inclusion came with the introduction of Pradhan Mantri Jan-Dhan Yojana (PMJDY) in August 2014. As per RBI, more than 43.04 crore beneficiaries have been banked under PMJDY since inception as on 10th January 2022. The journey of PMJDY led interventions undertaken over a short span of 7 years has in effect, produced both transformational as well as directional change thereby making the emerging FI ecosystem capable of delivering financial services to the last person of the societythe poorest of the poor. The notable point is that 55% Jan-Dhan account holders are women and 67% Jan Dhan accounts are in rural and semi-urban areas. Issuing licenses for Small Finance Banks and Payment Banks by RBI gave further impetus to this scheme. The Ministry of Finance and National Informatics Centre jointly developed a mobile app called JanDhan Darshak, with a view to enable common people in locating financial service touch points. The role of mobilebanking and India Post has also been highly significant. With 154000+ post offices, of which 90% are in rural areas, it is the friendly postman you meet every day, who could be your banking relationship manager.

National Strategy for Financial Inclusion (NSFI) 2019-24 - The NSFI for the period 2019-2024 was formulated by the RBI under the aegis of Financial Inclusion Advisory Committee (FIAC) and was approved by the Financial Stability Development Council (FSDC) after wide ranging discussions with all stakeholders and based on the feedback received. The NSFI 2019-2024 sets forth the vision and key objectives of the financial inclusion policies in India to help expand and sustain the financial inclusion process at the national level through a broad convergence of action involving all the stakeholders in the financial sector. The strategy aims to provide access to formal financial services in an affordable manner, broadening and deepening financial inclusion and promoting financial literacy and consumer protection.

Financial Inclusion in Agrarian Sector- As per Census 2011, only 58.7 percent of households were availing banking services in the country in 2011. The National Sample Survey Organization (NSSO) 70th Round Survey shows, institutional and non-institutional sources of credit have almost identical shares 49% and 51% respectively. In the former category, more than 1/3rd of loans come from cooperative societies in states like Maharashtra, Gujarat, Kerala, Punjab etc. In southern states, commercial banks and Regional Rural Banks have played a major role in providing credit to farmers. Still, small and marginal farmers in particular, depend quite substantially on moneylenders.

·         RuPay - An Indian domestic debit card introduced in 2012 by National Payments Corporation of India, proved to be a gamechanger in creating better digital infrastructure and enabled faster penetration of debit card culture.

·         Self Help Groups (SHG) -Bank Linkage Program- Launched by NABARD (National Bank for Agriculture and Rural Development) way back in 1992, as an alternative credit delivery mechanism for reaching the unreached, this initiative has proved to be a considerably remarkable milestone for achieving the target of financial inclusion. As per NABARD's latest Annual Report, with about 112 lakh SHGs operating in all the nooks and corners of semi-urban and rural India, this program has become the largest Micro Credit Program of the world.

·         Joint Liability Groups Scheme - This is yet another institutional intervention introduced in 2004 by NABARD with a view to enable landless/tenant farmers, oral lessees secure collateral free loans for productive purposes from the banking system just on the basis of joint undertaking .

Business Correspondent Model- RBI, in view of the fact that opening bank branches in all locations cannot be a viable proposition, in January 2006, permitted banks to employ Business Correspondents and Business Facilitators, for providing banking and financial services in remote areas. As of now, more than 12.4 lakh BCs have been operating. Keeping in view the important role played by the Cooperative Banks in providing banking facilities to the rural populace, still outside the ambit of formal banking, certain amendments to the Banking Regulation Act 1949 have been made for increasing professionalism, enabling access to capital and improving governance and oversight for sound banking through the RBI.

Direct Benefit Transfer - This is yet another initiative introduced on 1st January 2013 to change the mechanism of transferring subsidies, directly to the people through their bank accounts.

PM MUDRA Yojana: The credit needs of all stakeholders ranging from the budding entrepreneurs to the hardworking farmers have also been catered to through the Pradhan Mantri MUDRA Yojana (PMMY) launched in 2015. Under this scheme, collateral free loans of up to Rs 10 Lakh are extended by Member Lending Institutions i.e. banks, MFIs and NBFCs, with a view to bring those 'financially excluded' in the ambit of formal banking system.This has given wings to the dreams and aspirations of millions, along with a feeling of self-worth and independence. Banks and financial institutions have sanctioned more than Rs15 lakh crore to over 28.68 crore beneficiaries in the last six years.

Stand-Up India Scheme: The scheme facilitates bank loans between Rs. 10 lakh and Rs. 1 crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank branch for setting up a greenfield enterprise. As per the latest figures of Ministry of Finance, 134596 applications have been sanctioned with total loan amounting to Rs 30294.65 crore. The margin money requirement for loans under the Scheme has been reduced from 'upto 25%' to `upto 15%' and activities allied to agriculture have been included in the scheme. In addition, the period of the scheme has also been extended to 2025.

Interventions for MSMEs and SMEs: The central government has well realized the truth that the highly viable and market principles based solution for financial inclusion lies in unleashing the untapped potential of the Micro, Small and Medium Enterprises (MSME) and unorganized segments by improving their bankability and, thereby, their competitiveness as well. This is effectively a 'multiplier impact' model, with focus on inclusive economic development and progress. With this objective, as per Union budget 2022-23, Emergency Credit Line Guarantee Scheme (ECLGS) will be extended until March 2023, and its guarantee cover will be increased by Rs.50,000 crore, bringing the total cover to Rs 5 lakh crore. The incentive to boost the adoption of FinTech by MSME and SME segment has enabled them to get easy access to banking and financial services. Government's focus on FinTech innovations and necessary support for them to continuously enhance their proposition, has paved way for future investments to support financial inclusion.

Insurance and Social Security Schemes for the Uncovered: The Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJBY) and Prime Minister Suraksha Bima Yojana (PMSBY) to help the vulnerable sections stay prepared in cases of unforeseen emergencies, the Atal Pension Yojana- another flagship social security scheme for workers of the unorganized sector, Sukanya Smridhi Yojana- a small scale savings scheme for the daughter's education and marriage etc. are important milestones achieved by the Government of India in the last few years in the direction of ensuring last mile delivery of financial inclusion agenda.


In the present age of information and communication technology, it is more than obvious that apart from other measures, technology can be strongly leveraged to achieve the objective of financial inclusion and literacy. As David Brear, the founder and CEO at 11:FS aptly said, 'Technological Innovations will be the heart and blood of banking industry for many years to come and if big banks do not make the most of it, the new players from FinTech and large technology companies surely will."

Thanks to technology, there has been massive improvement in deepening of digital financial services. The Jan Dhan, Aadhaar and Mobile (JAM) eco system has made a significant difference in the universe of financial inclusion. Further, several initiatives have been taken for the creation of enabling digital infrastructure at the ground level and accelerate the progress towards universalising digital payments in a convenient, safe, secure and affordable manner. The use of e-KYC to ease the account opening process, use of Aadhar-enabled Payment system for interoperability, support for setting up Financial Literacy Centres, support for demonstrating banking technology (Mobile-van fitted with ATM), bringing all the Cooperative banks and Regional Rural Banks on CBS (Core Banking System) platform by NABARD, the financial technology players like FINO, EKO, Nokia, Integra, A Little World, have also been roped in the mission to be accomplished. Š

·         Digital India: The Digital India initiative, coupled with a payment infrastructure, is laying the cornerstone for a digital economy. Keeping in mind the increasing willingness of people to use the internet and the rising data traffic in the country, an investment of $18.4 billion has been made to provide last mile internet connectivity, better access to government services, and development of IT skills, and provision of broadband internet access to 250,000 village-clusters. To promote digital transactions for personal consumption expenditure, two schemes viz. Lucky Grahak Yojana and Digi Vyapar Yojana were funded through Financial Inclusion Fund for consumers and merchants respectively. Š

·         Aadhar-enabled Payment System (AEPS): Developed by the National Payments Corporation of India (NCPI), AEPS is a payment service based on an individual's Aadhaar card (one can use Aadhar card instead of debit or credit cards) which enables the owner of the card to make financial transactions such as transfer funds, make payments, deposit cash, make withdrawals, etc. The AEPS is bank agnostic and enables a customer to make transactions from any point of Sale or micro ATMs via using Aadhaarbased and biometric authentication. The project started in 2016 is likely to be the biggest disruptor in financial inclusion delivery, as innovations leveraging the Aadhar Card are expected to assist in broad-basing the access and acceptance by financially excluded segments. The NITI Aayog has discussed that the use of Artificial Intelligence (AI) has an important part to play in the scheme as there is scope for creation of multilingual chatbot to aid customers, ensuring safe and secure payments, elimination of false declines, etc. Š

·         Payments Banks: The new model of banking conceptualized by RBI is aimed at widening the spread of payment and financial services to small businesses, low-income households, and migrant labour workforce in secured technology-driven environment in remote areas of the country. With more than 500 million Indians owning smart mobile phones, leveraging its penetration to rural areas, has its advantages over traditional banking methods because of breaking down geographical constraints alongwith immediacy, security and efficiency. It offers an innovative low-cost channel to expand the reach of banking and payment services especially to the large section of rural mobile subscribers. Š

·         V-SAT for Remote Areas: Since connectivity and power issues can badly affect banking services, particularly in remote areas, all Cooperative Banks in the North East Region (NER) and the Andaman and Nicobar (A&N) Islands have been made eligible for support for solar powered V-SATs with financing from the 'Financial Inclusion Fund'. V-SAT connectivity support is also extended to all banks for new branches being opened in identified Left Wing Extremism (LWE) affected districts, restricted to 7 branches per district.


With greater financial inclusion, there is a need to enhance customer protection and financial education so that people continue to access the formal financial services without hesitation. Needless to add that financial education plays a vital role in creating demand side response by enabling greater awareness and access to appropriate financial products and services through regulated entities. Financial resilience of individuals and their families can also be strengthened through financial education. To achieve these multiple objectives, several steps have been taken.

National Strategy for Financial Education (NSFE 2020-2025) - The NSFE (2020-2025) has set an ambitious vision of creating a financially aware and empowered India. It focusses on various aspects of financial education across banking, insurance, pension and investments through greater role for financial institutions (both banks and nonbanks), educational institutions, industry bodies and other stakeholders. In order to reach out to the various target groups [school children, teachers, young adults, women, new entrants at workplace/ entrepreneurs (MSMEs), senior citizens, Divyang persons, illiterate people, etc.], innovative techniques and digital modes of delivery including targeted modules for specific categories of customers have been envisaged. Further, due emphasis has also been given to safe usage of digital financial services and enhancing awareness about grievance redressal measures. Keeping in view the importance of evidence-based policy making, evaluation methods to assess progress in financial education have also been identified as one of the strategic objectives. The strategy includes a '5 Cs' approach for dissemination of financial education through emphasis on development of relevant Content (including Curriculum in schools, colleges and training establishments); Capacity of the intermediaries who provide financial services and education; leveraging on the positive effect of Community led model for financial literacy through appropriate Communication Strategy; and enhancing Collaboration among various stakeholders.

National Centre for Financial Education (NCFE) - The NCFE has been set up by the four financial sector regulators as a (Not for Profit) Company to promote Financial Education across India for all sections of the population as per the National Strategy for Financial Education (NSFE). NCFE undertakes financial education campaigns across the country through seminars, workshops, conclaves, training programmes, campaigns, etc. to help people manage money more effectively and achieve financial wellbeing in the process.

Centre for Financial Literacy (CFL) Project - An innovative way to impart financial education through community approach. The CFL project has been conceptualised by the RBI in 2017 as an innovative and participatory approach to financial literacy at the Block level involving select banks and NGOs. Initially set up in 100 blocks on a pilot basis, the project is now being scaled up across the country to every block in a phased manner by March 2024. This was one of the announcements made on 4th December 2020 as part of the MPC (Monetary Policy Committee) statement. Going forward, the project is envisaged to change the paradigm of financial inclusion as well as education by ensuring greater involvement and receptibility of the community on the demand side so as to align with the expansion of institutional initiatives on the supply side.

In the last couple of years, the COVID19 related nationwide lockdown and restrictions on mass gathering of people at various public places resulted in disruption in conducting conventional financial literacy camps. During this period, various approaches like using social media, mass media (including local TV channels, Radio), reaching out to local school education boards, training missions of the SHGs were undertaken across the country to continue dissemination of financial education.


Let us ponder over the implications of announcements made in the Union Budgets of last three years towards achieving the goal of rural financial inclusion. Knowledge transfer centers are being set up across new emerging sectors. A total outlay of Rs 8,000 crore has been allocated for over five years for The National Mission on Quantum Technology and Applications. The government's vision is to provide 100 percent digital access to all public institutions, banks as well as Anganwadi centres, health and wellness centres, post offices and other rural welfare centres. Fibre-to-home through BharatNet is aimed at linking 2,50,000 Gram Panchayats. Another step proposed towards combating financial exclusion is mobilizing more and more SHGs.

If we look at the Union Budget 2022-23, it is focused on digitalisation and financial inclusion more than ever. The introduction of 75 digital banking systems in 75 districts by scheduled commercial banks will empower the population digitally in a consumer-friendly manner, supporting inter-operability and financial inclusion. FinTech has immense potential to strengthen the underserved sections and to reach every nook and corner of the country. This will enable many consumers to experience digital banking for the first time at their convenience. Digital banking, lending, collection, and payment have effectively contributed to increasing financial inclusion and have been the key area of focus for the country. Digital debt collection is another key step towards digitization. When customers are empowered by digital experiences specific to their needs, the debt collection process becomes seamless and pain-free. The digitalized debt collection approach can aid in facilitating financial inclusion by providing intelligent personalized experiences with options to resolve debt on their terms. Debt collections have traditionally been a labour-intensive task and have always fallen short of expectations. However, with advancement in technologies like Artificial Intelligence and Machine Learning, the debt collections space can evolve tremendously. Such technologies can assist in reaching out to customers through contextual nudges in their preferred language, easing up the debt collections process. Additionally, post offices have come on the core banking system enabling financial inclusion and access to accounts through net banking, mobile banking, ATMs, and online transfer of funds between post office accounts and bank accounts.


India has taken massive strides towards financial inclusion. The proportion of people joining the formal financial system in terms of owning an account at financial institutions has more than doubled since 2011. More than 80% of adult Indians have bank accounts, according to the latest Global Findex Database. These are the creditable achievements for the country. However, getting a unique identity, having a bank account and using digital payments are just the foundations of financial inclusion. Now these basics have been addressed, the government and private sector must take the next steps to build a superstructure of economic prosperity. The following vital steps need to be taken by all the stakeholders for achieving this ambitious yet the most important objective of true financial inclusion:- Š

·         Financial firms must understand the market and structure products accordingly. Since agricultural income is seasonal and lumpy, while lending to a farmer, they need to structure a loan product where the repayment cycle is seasonal and not monthly. Š

·         In a country as vast and diverse as India, deeper understanding of the market can only come if firms have a widespread distribution and they recruit locally the ones who are familiar with the cultural and economic nuances of the community in which they work. Š

·         Partnership between the government and providers of various financial products is the need of the hour so that risks and rewards of working with marginal populations are shared. Š

·         This campaign for financial literacy will need a multipronged, bottoms-up approach. RBI and banks should coordinate with institutions such as State Education Boards (SEBs), Central Board of Secondary Education (CBSE), University Grants Commission (UGC) and All India Council for Technical Education (AICTE), to include Financial Inclusion as a mandatory subject at different levels right from school to higher levels of education, so that the next generation of students become aware of the significance of nurturing good loan repayment culture and the society becomes digitally savvy. Š

·         NGOs, corporate sector, banks, NBFCs and government departments currently engaged in FI should be persuaded to increase thrust. Unless using FI infrastructure becomes a mass agenda, the real benefit cannot accrue to the society. Needless to emphasize, global research has already linked poverty alleviation to FI brought about through financial awareness. Having invested huge sums of money in building FI infrastructure, the next wave of inclusion should be to prompt beneficiaries to use their access to financial services for improving their economic and social well-being.

 The author is Deputy General Manager, NABARD, Haryana Regional Office, Chandigarh. She can be reached at manjula.jaipur @gmail.com (References: rbi.in, worldbank.org)

Views expressed are personal