Financial Inclusion: Status and Progress


Wednesday, April 11, 2018 /09:00AM /Resurgent India 

Background & Current Status
Financial Inclusion is a key enabler to economic, social and transaction security of a country, thereby driving inclusive growth. It is for this reason that financial inclusion has been one of the key government priorities over the years, through various initiatives like Nationalization of Banks, Expansion of Banks branch network, Lead Bank Scheme, Business Correspondent Model, Mobile banking, Aadhaar enabled banking accounts, e-KYCs etc. 

Despite these various measures, poverty and exclusion continue to dominate socio-economic and political discourse in India even after six decades of post economic independence era. Though economy has shown impressive growth during post liberalization era of 1991, impact is yet to percolate to all sections of the society and therefore, India is still home of 1/3rd of world's poor.

As per the census of 2011, more than 40 per cent of the Indian population did not have access to banking facilities. The graph below shows that a large population base is financially excluded both in urban and rural areas. Since low financial growth impedes economic growth, it was imperative for the government to initiate financial inclusion schemes that would alleviate poverty and reduce social inequity.

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A similar such survey -- World Bank Index Survey (2012) states that only 35% of Indian adults had access to a formal bank account and 8% borrowed from a formal financial institution in last 12 months. A comparison of key performance measures with global counterparts further builds on the point of financial deprivation:

Global Benchmarking on Key Performance Criteria, as of 2013
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Source: Financial Access Survey, IMF; KPMG Report, RBI Annual Reports  

The miniscule numbers across the statistical sources suggest an urgent need to further push the financial inclusion agenda to ensure that people at the bottom of the pyramid join the mainstream formal financial system. An inward look into the supporting infrastructure highlights the lack of the same. 

The present banking network of the country (as on 31.03.2014) comprises of a bank branch network of 1,15,082 and an ATM network of 1,60,055. Of these, 43,962 branches (38.2%) and 23,334 1 ATMs (14.58%) are in rural areas. This indicates that banking in India is under-penetrated in comparison to other emerging markets with 70 per cent of the country’s population, predominantly rural, being serviced by 38 per cent of branches and 15 per cent of ATMs.

Moreover, there are more than 1.4 lakh Business Correspondents (BCs) of Public Sector Banks and Regional Rural Banks in the rural areas. BCs are representatives of bank to provide basic banking services i.e. opening of basic Bank accounts, cash deposits, cash withdrawals, transfer of funds, balance enquiries, mini statements etc.

Financial Inclusion – Banks Status and Progress
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Financial Inclusion Opportunity for Banks
As per a recent Accenture report, the financial inclusion opportunity for banks in India is estimated at USD 24.4 Bn by 2020. Within the emerging markets, this opportunity is pegged at USD 380 bn. As per the graph below, India lies just below Brazil in terms of the overall size of the opportunity. Banks have the potential to register substantial revenues if they serve the unbanked and underbanked segments in a cost effective manner.

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With the emergence of JAM (Jan DhanYojana, Aadhaar, Mobile numbers) and advent of new and innovative mobile technologies, it will be relatively easier to reach the lowest income and micro segment consumers. In order to capitalize on this opportunity, the banks will be required to enhance their focus on the financially excluded segments.

Government and RBI Initiatives
The efforts to include the financially excluded segments of the society into formal financial system in India are not new. The concept was first mooted by the Reserve Bank of India in 2005 and Branchless Banking through Banking Agents called Bank Mitr (Business Correspondent) was started in the year 2006. Thereafter, the Indian banking sector has witnessed a sustained push in the form of a number of initiatives and reforms from the government as well as the Reserve Bank of India (RBI) to achieve financial inclusion, a brief snapshot below:

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RBI has always emphasized upon the deepening and widening the reach of Financial Services so as to cover a large segment of the rural & poor sections of population. In 2006, RBI advised Banks to align their policies with the objective of financial inclusion, which saw the launch of basic banking ‘No frills’ account. Over the years, banks have introduced many innovations in the form of micro- ATMs, Basic Saving Bank Deposit accounts, kisan credit cards, general credit cards, and freedom prepaid cards, biometric cards, Business Correspondent Banking, relaxed KYC norms and simplified branch authorization policy, etc. to achieve financial inclusion. Moreover, mandatory requirement of opening new branches in un-banked rural centers have also helped further the cause of financial inclusion.

In the last five years, the government’s financial inclusion approach has undergone several changes. In 2011, the government launched ‘Swabhimaan’, another financial inclusion scheme focused on providing banking services to unbanked villages with a population greater than 2000. In the second phase, the scheme was extended to cover villages with population of at least 1,600.

RBI also created a Financial Inclusion Fund (FIF) with a corpus of Rs 2,000 crore to support 'developmental and promotional activities' for expanding reach of banking services towards securing greater financial inclusion. The FIF aims to support developmental and promotional activities including creating of Financial inclusion infrastructure across the country in order to secure greater financial inclusion.

While these initiatives have brought more people into the banking ecosystem, there is still a long way to go to achieve the vision of complete & comprehensive financial inclusion.

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