Relevance: GS-2 : Issues Relating to Development and Management of Social Sector/Services relating to Health, Education, Human Resources, GS-3 : Inclusive Growth and issues arising from it.

Key phrases: Financial inclusion, Financial integration, PMJDY

Why in news?

 Government’s efforts for financial inclusion are paying off even in remote areas.

Analysis:

What is financial inclusion?

• 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.
• According to the world bank, financial inclusion means that individuals and businesses have access to affordable financial products and services that meet their needs.
• Since independence, the combined efforts of successive governments, regulatory institutions, and the civil society have helped in increasing the financial-inclusion net in the country.

Importance of financial inclusion

• Since independence, the combined efforts of successive governments, regulatory institutions, and the civil society have helped in increasing the financial-inclusion net in the country.
• Further, by bringing low income groups within the perimeter of formal banking sector; financial inclusion protects their financial wealth and other resources in exigent circumstances
• Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.
• Availability of sufficient and transparent credit from formal banking institutions will promote the entrepreneurial spirit among the people, leading to an increase in productivity and prosperity in rural areas.
• Service delivery: Direct cash transfers to beneficiary bank accounts rather than physical cash payments against subsidies have become possible. Thus funds actually reach the targeted beneficiaries instead of being siphoned off along the way.
• Banks’ efficiency: Banks which are operating in a financial inclusion sector could experience higher operating efficiency in financial intermediation

Government efforts for financial inclusion

• Jan Dhan Yojana-380 million bank accounts had been opened under PMJDY.
• Atal Pension Yojana which brings unorganized sector into fold of social security by giving fixed pension after 60 as per their previous contribution
• Stand up India scheme which promotes entrepreneurship among SC/ST/women and composite loans by banks between 10-100 lakhs for non-farm sector
• Aadhaar has not only brought about a secure and easily verifiable system but also easy to obtain as well to help in the financial inclusion process
• With the strengthening of the Unified Payment Interface (UPI) by NPCI, digital payments have been made secure, compared to the past
• Reserve Bank of India has undertaken a project titled "Project Financial Literacy". The Objective of the project is to disseminate information regarding the central bank and general banking concepts to various target groups, including, school and college going children

Current status in India

• According to the World Bank’s Global Financial Inclusion Database or Global Findex Report (2017), 80% Indian adults have a bank account against the 53% estimated in 2014
• The Findex 2017 report also estimates that 77% Indian women have bank accounts, against 43% in 2014.
• There has been an active participation of the private players (payment banks like Paytm, Airtel money and Jio money), as they have also realised that bringing the poor into the financial net is beneficial to their business models as well.
• The convergence of JAM trinity with the Direct Benefit Transfer (DBT) scheme has largely been successful.
• Growth in SHG-Bank linkage- there are around 7.46 million saving linked SHGs with aggregate savings of Rs.70.16 billion and 1.19 million credit linked SHGs with credit of Rs. 145.57 billion
• Growth of MFIs-At present, around 30 MFIs have been approved by RBI. Their asset size has progressively increased to reach Rs. 19,000 crore as at end Sept 2013.
• Bank credit to MSME sector witnessed a CAGR of 31.4% during the period March 2006 to March 2012. Of total credit to MSME, public sector banks contributed the major share of 76%,

Challenges with financial inclusion

• Bank accounts are a gateway to all financial services. But, according to a report by the World Bank, about 190 million adults in India do not have a bank account, making India the world’s second largest nation in terms of unbanked population after China.

• Digital Divide-The most common barriers to the adoption of digital technology which may promote financial inclusion:

• Implement Deficit -For instance, the Jan Dhan scheme has resulted in the opening of many dormant accounts which never saw actual banking transactions.

• India is a highly cash dominated economy; this poses a challenge for digital payment adoption.
• At present, only about 5% of India’s 6 lakh villages have bank branches. There are 296 under-banked districts in states with below-par banking services. Thus, bank reach is poor in rural areas leading to financial exclusion.
• Regional disparity - A review by the Rangarajan Committee shows that financial exclusion is highest among households in the Eastern, North -Eastern and Central areas of the country partly due to poor infrastructure.
• Financial institutions are reluctant to serve small value and unprofitable customers with irregular income. Banks perceive inclusion as an obligation rather than a business opportunity.
• MSME Annual Report, 2021 says India has 63.8 million unincorporated Medium, Small and Micro Enterprises (MSMEs); of which 99 per cent are micro. A substantial number is outside the ambit of formal finance.

International Finance Corporation (IFC) estimates that the MSME segment has a credit gap of ₹25.8 trillion, and is growing at a Compound Annual Growth Rate (CAGR) of 37 per cent.

• Also, according to the International Labour Organization (ILO), about 81% of the employed persons in India work in the informal sector
• As per the 6th Economic Census, only 20 per cent of women-owned enterprises access formal finance.
• Lack of Credit Penetration-One of the main constraints in providing credit to low-income households and informal businesses is the lack of information available with formal creditors to determine their credit worthiness.

This results in a high cost of credit. Due to this, in 2016, the number of loan accounts per 1,000 adults was 154 in India.

Way ahead

• Financial products need to be designed from the demand perspective and not only from the point of view of the lenders’ convenience
• To facilitate empowerment in the true sense of the term, it is not enough to be included, but also important to be integrated. The financial services industry is a key stakeholder and should aim to adopt innovations for addressing supply-side challenges such as limited underwriting ability, lack of product relevance/innovation, higher cost of operation and challenges in last mile distribution.
• 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.
• In addition to greater digitization, there is also a need to strengthen cyber security and data protection regime in the country
• Differentiated Banks like Payment banks and small finance banks can be leveraged to scale up payments systems in underserved areas.
• Payments through the USSD channel should be promoted (by reimbursing the charges incurred in the USSD process), as they have an advantage over the internet in that it can also cover a large proportion of non-smartphone users.

Source: The Hindu BL

Mains question:

Q. Outline the major milestones in promoting financial inclusion since independence. What are the next set of challenges in achieving universal access to financial services? (15 Marks, 250 Words).