India makes strides in financial inclusion, but issues remain

financial inclusion
RBI’s Financial Inclusion Index has risen to 56.4 in March 2022. This is a significant increase from 53.9 in March 2021 and is reflective of growth across all sectors, the report said.

Financial Inclusion Index: While the year hasn’t been a good one on various fronts for India or the countries across the globe alike, RBI has brought one cheer with its Financial Inclusion Index. The Reserve Bank of India’s (RBI’s) composite financial inclusion index (FI-Index) that captures the extent of financial inclusion across the country has risen to 56.4 in March 2022. This is a significant increase from 53.9 in March 2021 and is reflective of growth across all sectors, the report said. This is despite the hurdles posed by the aftereffects of the coronavirus pandemic. 

In its bi-monthly policy monetary policy statement released in 2021, the central bank had said that financial inclusion has been viewed as a key enabler for achieving inclusive and sustainable development worldwide. This has also been a core area for the government, the RBI and other regulators, which have collectively taken a number of steps to ensure better inclusion over the years. The FI-Index is published annually in July every year. 

Government runs several schemes to improve Financial Inclusion. This includes Jeevan Suraksha Bandhan Yojana, Pradhan Mantri Vaya Vandana Yojana, Pradhan Mantri Mudra Yojana, Stand Up India scheme, Venture Capital Fund for Scheduled Castes under the social-sector initiatives, Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension Yojana (APY), Varishtha Pension Bima Yojana (VPBY), Credit Enhancement Guarantee Scheme (CEGS) for scheduled castes, and Sukanya Samriddhi Yojana.

So far, the PMJDY scheme has more than 45 crore beneficiaries with Rs 1,71,616 crore funds in beneficiary accounts. The scheme also serves to push Direct Benefit Transfer (DBT) to the beneficiaries account. 

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What is Financial Inclusion?

By Financial inclusion, the government aims to increase the availability of banking and financial services to individuals in a transparent and affordable manner. The main objectives are to provide a basic no-frills banking account for making and receiving payments, offering saving products (including investment and pension), providing remittance, or money transfer facilities and micro insurance (life) and non-micro insurance (life and non-life) along with micro pension.

With FI, the government aims to include everybody in society by giving them basic financial services regardless of their income or savings and also focuses on providing financial solutions to the economically underprivileged. 

The term is broadly used to describe the provision of savings and loan services to the poor with the goal that these services may not be expensive to them and are presented in easy-to-use form. The underlying aim is to ensure that the poor and marginalised make the best use of their money and attain financial education. 

While the concept of financial inclusion was first introduced in India in 2005 by the RBI, the cause has seen a thrust with the advent of financial technology and digital transactions. More and more startups are now also making financial inclusion simpler to achieve. The government also introduces various schemes which help in attaining better Financial Inclusion. In the Economic Survey 2021-22, the Centre talked about the Retail Direct Scheme for channelling the savings of the middle class, small businessmen and senior citizens directly into risk free government securities. According to the government, the scheme will also give a boost to financial inclusion. 

How is FI-Index calculated?

The FI-Index is based mainly on three broad parameters. This includes access which has 35% weightage, usage with 45% weightage, and quality with remaining 20% weightage. These broad categories have further divisions as well and consist of various dimensions, which are computed based on a number of indicators. In total, the FI-Index is responsive to 97 indicators. A unique feature of the FI-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 is constructed without any base year and hence reflects the cumulative efforts of all stakeholders over the years. 

The index calculates 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.  

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Importance of Financial Inclusion in India

Financial inclusion is especially pertinent in a country like India where most of the population resides in rural areas and may lack access to economic resources. Inculcating financial literacy becomes important in such areas as there is no concept of savings among the poor as they live on mostly hand-to-hand basis. Financial inclusion is a major step towards inclusive growth and helps in the overall economic development of the underprivileged population. In India, effective financial inclusion is needed for the uplifting of the poor and disadvantaged people by providing them with the modified financial products and services.

Way ahead

However, the government still has a long way to go to achieve maximum FI, even if it is closing gaps for some years now. For one, while everyone may have an account, not all are going to use one.  In fact, policymakers need to tackle the lack of urge of account holders to route their transactions through these accounts. To that end, more work is needed towards educating masses and dissemination of financial literacy as it assumes lot of significance in making full use of FI.

Secondly, amid the expansion of various channels of banking touch points, the growth in the number of branches may not be significant during 2021-22, something that the government must look into in the future.

FI is globally considered as an effective tool to unleash the development potentiality of the economy, according to the World Bank. It has also been identified by the UN as an enabler for 7 of its 17 sustainable development goals (SDG) to be achieved by 2030.

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