Financial Inclusion in India

Definitions

• 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 (The Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan).
• Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products (The Committee on Financial Sector Reforms, Chairman: Dr.Raghuram G. Rajan). Household access to financial services is depicted in Figure I.

• The essence of financial inclusion is to ensure delivery of financial services which include - bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, insurance facilities (life and non-life) etc.

Why Financial Inclusion ?

• Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segment of rural population and plays its own role in the process of economic development. 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.
• In 2022–2023, India's Gini coefficient for rural areas was 0.266, down from 0.283 in 2011–2012, and for urban areas it was 0.314, down from 0.363. 

Extent of Financial Exclusion

The extent of financial exclusion from different perspectives / angularities is presented based on different data sources viz.:

1. Financial Inclusion Index
2. Government of India Population Census 2011
3. NSSO 70th Round Survey Results
4. CRISIL - Inclusix
5. RBI reports
6. IMF ‘Financial Access Survey’ Results
7. NABARD All India Rural Financial Inclusion Survey 2016-17

Financial Inclusion Index

In consultation with the concerned stakeholders including the Government, the Reserve Bank of India had constructed a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country, which was first published in August 2021 for the FY ending March 2021.

The FI-Index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with Government and respective sectoral regulators. The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion. The FI-Index comprises of three broad parameters (weights indicated in brackets) viz., Access (35%), Usage (45%), and Quality (20%) with each of these consisting of various dimensions, which are computed based on a number of indicators.

The Index is responsive to ease of access, availability and usage of services, and quality of services, comprising in all 97 indicators. A unique feature of the Index is the Quality parameter which captures the quality aspect of financial inclusion as reflected by financial literacy, consumer protection, and inequalities and deficiencies in services.

The FI-Index has been constructed without any ‘base year’ and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion. The FI-Index will be published annually in July every year.

The value of FI Index for March 2022 stands at 56.4 vis-à-vis 53.9 in March 2021, with growth witnessed across all the sub-indices.

Government of India Population Census 2011

• As per census 2011, only 58.7% of households are availing banking services in the country. However, as compared with previous census 2001, availing of banking services increased significantly largely on account of increase in banking services in rural areas (Chart 2).

NSSO 70th Round Survey Results

• At the all-India level, institutional and non-institutional sources of credit have almost identical shares (viz. 49 per cent and 51 per cent).
• Regarding the role of different entities/banks within the institutional sources category, cooperatives are found to have played a relatively more important role in states like Maharashtra, Gujarat, Kerala, and Punjab in providing loans to farmers. More than one-third of loans in these states come from cooperative societies.
• In most southern states, commercial banks and Regional Rural Banks have played a major role in providing credit to farmer households. Close to one-fourth of the loans in these states come from banks directly and indirectly through SHGs which are bank linked.
• Amongst farmers who have accessed credit, 83 per cent of the total loans taken by large farmers are from institutional agencies, while around 60 per cent of marginal farmers’ loans are from institutional agencies. Farmers in general, and small and marginal farmers in particular, depend quite substantially on moneylenders

CRISIL-Inclusix

• In June 2013, CRISIL first time published a comprehensive financial inclusion index (viz.,Inclusix). For constructing the index, CRISIL identified three critical parameters of basic banking services namely branch penetration, deposit penetration and credit penetration.
• The CRISIL Inclusix indicate that there is an overall improvement in the financial inclusion in India.
• CRISIL –Inclusix (on a scale of 100) increased from 35.4 in March 2009 to 37.6 in March 2010 and to 40.1 in March 2011. It stood at 58.0 at the end of fiscal 2016.

RBI Reports

• Sadhan Kumar (2011) worked out an Index on financial inclusion (IFI) based on three variables namely penetration (number of adults having bank account), availability of banking services (number of bank branches per 1000 population) and usage (measured as outstanding credit and deposit). The results indicate that Kerala, Maharashtra and Karnataka has achieved high financial inclusion (IFI >0.5), while Tamil Nadu, Punjab, A.P, H.P, Sikkim, and Haryana identified as a group of medium financial inclusion (0.3)

IMF ‘Financial Access Survey’ 2023 - India statistics

Access and use of Financial Services

For the complete list, click here.

NABARD All India Rural Financial Inclusion Survey 2016-17

1. Distribution of Households who took loan - 59 % only Institutional, 32 % - Only Non-Institutional and the rest were from both sources.
2. Among Agricultural Households owning more than 0.4 ha land and those who took any loan for agricultural purposes from a cooperative/ commercial/ rural bank, 32% reported to be having Kisan Credit Cards. These households utilized 83% of the sanctioned limit in the last one year.
3. On the whole, 23% households reported that any of its members were associated with a microfinance group at the time of survey. When asked about the type of group, 20% reported to be associated with Self Help Groups.

RBI Policy Initiatives and Progress in Financial Inclusion

• RBI has adopted a bank-led model for achieving financial inclusion and removed all regulatory bottle necks in achieving greater financial inclusion in the country. Further, for achieving the targeted goals, RBI has created conducive regulatory environment and provided institutional support for banks in accelerating their financial inclusion efforts.

Financial Inclusion Initiatives

• Advised all banks to open Basic Saving Bank Deposit (BSBD) accounts with minimum common facilities such as no minimum balance, deposit and withdrawal of cash at bank branch and ATMs, receipt/ credit of money through electronic payment channels, facility of providing ATM card.
• Relaxed and simplified KYC norms to facilitate easy opening of bank accounts, especially for small accounts with balances not exceeding Rs. 50,000 and aggregate credits in the accounts not exceeding Rs. one lakh a year. Further, banks are advised not to insist on introduction for opening bank accounts of customers. In addition, banks are allowed to use Aadhar Card as a proof of both identity and address9.
• Simplified Branch Authorization Policy, to address the issue of uneven spread bank branches, domestic SCBs are permitted to freely open branches in Tier 2 to Tier 6 centers with population of less than 1 lakh under general permission, subject to reporting. In North-Eastern Sates and Sikkim domestic SCBs can open branches without having any permission from RBI. With the objective of further liberalizing, general permission to domestic scheduled commercial banks (other than RRBs) for opening branches in Tier 1 centres, subject to certain conditions.
• Compulsory Requirement of Opening Branches in Un-banked Villages, banks are directed to allocate at least 25% of the total number of branches to be opened during the year in un-banked (Tier 5 and Tier 6) rural centers.
• Opening of intermediate brick and mortar structure, for effective cash management, documentation, redressal of customer grievances and close supervision of BC operations, banks have been advised to open intermediate structures between the present base branch and BC locations. This branch could be in the form of a low cost simple brick and mortar structure consisting of minimum infrastructure such core banking solution terminal linked to a pass book printer and a safe for cash retention for operating larger customer transactions.
• Public and private sector banks had been advised to submit board approved three year Financial Inclusion Plan (FIP) starting from April 2010. These policies aim at keeping self-set targets in respect of rural brick and mortar branches opened, BCs employed, coverage of un-banked villages with population above 2000 and as well as below 2000, BSBD accounts opened, KCCs, GCCs issued and others. RBI has been monitoring these plans on a monthly basis.
• Banks have been advised that their FIPs should be disaggregated and percolated down up to the branch level. This would ensure the involvement of all stakeholders in the financial inclusion efforts.
• In June 2012, revised guidelines on Financial Literacy Centres (FLCs). Accordingly, it was advised that FLCs and all the rural branches of scheduled commercial banks should scale up financial literacy efforts through conduct of outdoor Financial Literacy Camps at least once a month, to facilitate financial inclusion through provision of two essentials i.e. ‘Financial Literacy’ and easy ‘Financial Access’. 
• Licensing of New Banks: The present round of licensing new banks is essentially aimed at giving further fillip to financial inclusion efforts in our country. Innovative business models aimed at furthering financial inclusion efforts would be looked into closely in processing applications for banking license. Financial inclusion plan would be an important criterion for procuring new bank licenses (Dr. D Subbarao).
• The four big successes of India’s public digital infrastructure have been Unified Payments Interface (UPI), Bharat QR, Bharat Bill Pay System (BBPS) and the RuPay card. 
• Jan Dhan, Aadhaar and Mobile, popularly known as the JAM trinity, has been a game changer of sorts.
• In terms of the revised guidelines issued by Reserve Bank of India (RBI) vide circular dated May 18, 2017, the term 'Branch" has been substituted by "Banking Outlet (BO)" which includes both brick and mortar branches and Business Correspondent (BC) outlets to enable Banks in expanding their network even in remote rural areas in a cost-effective manner for hassle free services to customers in rural areas. 
• The National Strategy for Financial Inclusion 2019-2024 (NSFI) and National Strategy for Financial Education 2020-2025 (NSFE) provide a roadmap for a coordinated approach towards financial inclusion, financial literacy, and consumer protection.

Progress in Financial Inclusion

• Progress of financial inclusion since the launch of financial inclusion plans clearly indicates that banks are progressing in areas like opening of banking outlets, deploying BCs, opening of BSBD accounts, grant of credit through KCCs and GCCs. 

Number of Branches Opened (including RRBs)

• Due to RBI’s concerted efforts since 2005, the number of branches of Scheduled Commercial Banks increased manifold from 68,681 in March 2006 to over 158,000 in May 2024, spread across length and breadth of the country.
• In rural areas, the number of branches increased from 30,572 to 53,893 during March 2006 to December 2023. 

Villages Covered:

• Providing banking access to every village within a 5 km radius/hamlet of 500 households in hilly areas is one of the key objectives of the NSFI: 2019-24. The milestone has been fully achieved in 27 states and 8 union territories (UTs) as on March 31, 2024; 99.99 per cent of the identified villages/hamlets across the country have been covered. Efforts are on to achieve the target for the remaining few villages/hamlets.

Total Bank Outlets (including RRBs)

• Total number of banking outlets in villages increased from 67,694 in March 2010 to 16,48,780 in December 2023. Of total branches, banking outlets through BCs increased from 34,174 to 15,92,598 during the same period
• BSBD Accounts Opened - The number of BSBD accounts opened increased from 73.45 million in March 2010 to 705.3 million in December 2023.
• RBI advised banks to provide small overdrafts in BSBD accounts. Accordingly up to December 2023, 5.3 million BSBD accounts availed OD facility of Rs. 5.79 billion (These figures respectively, were 0.18 million and 0.10 billion in March 2010).

Kisan Credit Cards (KCC) Issued:

• Banks have been advised to issue KCCs to small farmers for meeting their credit requirements. Up to December 2023, the total number of KCCs issued to farmers remained at 507 lakh with a total outstanding credit of Rs. 8,11,906 Cr..

General Credit Cards (GCC) Issued:

• Banks have been advised to introduce General Credit Card facility up to Rs. 25,000/- at their rural and semi-urban branches. Up to December 2023, banks had provided credit aggregating to Rs. 53,690 Cr. in 55 lakh GCC accounts.

ICT Based Accounts - through BCs

• In order to provide efficient and cost-effective banking services in the un-banked and remote corners of the country, RBI directed commercial banks to provide ICT based banking services – through BCs. These ICT enabled banking services have CBS connectivity to provide all banking services including deposit and withdrawal of money in the financially excluded regions.
• The number of ICT-based transactions through BCs increased from 26.52 million in March 2010 to 2729.4 million in December 2023, while transactions amount increased steadily from Rs.6.92 billion to Rs. 9862.36 billion during the same period.

Expansion of ATM Network:

All scheduled banks collectively added 4,452 ATMs (automated teller machines) in FY23, with their network standing at 2,19,513 as at March­ end 2023. 47.4 per cent of the ATMs are in rural areas. 

Financial Literacy Initiatives

• Financial education, financial inclusion and financial stability are three elements of an integral strategy, as shown in the diagram below. While financial inclusion works from supply side of providing access to various financial services, financial education feeds the demand side by promoting awareness among the people regarding the needs and benefits of financial services offered by banks and other institutions. Going forward, these two strategies promote greater financial stability.
• Financial Stability Development Council (FSDC) has explicit mandate to focus on financial inclusion and financial literacy simultaneously.
• RBI has issued revised guidelines on the financial literacy Centres (FLC) on June 6, 2012, for setting up FLCs, as detailed in Box 1 above.

Growth in SHG-Bank Linkage

• This model helps in bringing more people under sustainable development in a cost effective manner within a short span of time. As on March 2023, there are around 1.34 Cr saving linked SHGs with aggregate savings of Rs. 58,893 Cr. and 4.3 million credit linked SHGs with outstanding credit of Rs. 1,88,079 Cr. (Source: NABARD, Status of Microfinance in India).

Growth of MFIs:

• Though RBI has adopted the bank-led model for achieving financial inclusion, certain NBFCs which were supplementing financial inclusion efforts at the ground level, specializing in micro credit have been recognized as a separate category of NBFCs as NBFC-MFIs.
• At present, around 211 MFIs have been approved by RBI. Their asset size has progressively increased to reach ₹3,48,339 crore during 2022-23.

Bank Credit to MSME

• MSME sector which has large employment potential of 59.7 million persons over 26.1 million enterprises, is considered as an engine for economic growth and promoting financial inclusion in rural areas.  MSMEs primarily depend on bank credit for their operations.
• 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%, while private sector banks accounted for 20.2% and foreign banks accounted for only 3.8% as on March 31, 2012.

Insurance Penetration in the Country

• The total insurance (life and non-life) penetration, in terms of the ratio of insurance premium as a percentage of GDP increased from 2.32 in 2000-01 to 4.20 % in 2020-21. The life insurance penetration as a percentage of GDP stood at 3.2% and non-life insurance penetration at 1.0 % the same period. In other words, there is vast untapped potential as regards insurance penetration.

Equity Penetration in the Country

• The number of investor accounts accounted for a meagre 5-6 % of total population of the country.

Financial Inclusion Initiatives – Private Corporates:

• A few large private corporate have undertaken projects such as E-Choupal/ E- Sagar(ITC), Haryali Kisan Bazaar (DCM), Project Shakti (HUL), etc. Reportedly, these pioneering projects have brought about vast improvement in the lives of the participants and set the tone for economic development in their command areas; which is a pre-requisite for Financial Inclusion efforts to be undertaken by the banking system.

Stakeholder-wise Issues in Financial Inclusion

Taking into account the achievements stated in the previous section and based on our interactions with the stakeholders during our various outreach programmes, as also the feedback received from our meetings with the frontline managers, the more important issues which need to be attended; stakeholder-wise are listed in the table below

Stakeholder-wise Issues

Source: RBI