Financial inclusion: Time to tie up loose ends

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Financial inclusion has been identified as a key policy objective by the Union government. It has taken several steps to ensure the availability of financial services to all sections of the society, especially to those who have traditionally faced exclusion from the formal financial system. The last two decades saw the country making substantial progress in ensuring inclusion in terms of credit, deposits, savings, insurance, and remittance. However, there is still a wide gap between urban and rural areas on the level of financial inclusion.

The initiatives such as the Jan-Dhan Yojana (PMJDY) and MUDRA loans have had some success. The government is using digital technology and data analytics to improve the situation, but must focus on addressing the issue of financial fraud to ensure long-term sustainability of these initiatives. Financial inclusion is key to India emerging as global economic power and ensuring the sustainability of its economic development efforts.

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EGROW Foundation organised an online discussion on April 21 to discuss various issues related to financial inclusion in India. Edited excerpts of the presentations made by eminent speakers:

The financial inclusion agenda

Anil Sharma, Former Executive Director, Reserve Bank of India

Financial inclusion has been a policy objective of the Reserve Bank of India (RBI) since independence. The objective was to ensure sustainable and equitable growth in India. The RBI has taken various steps to provide credit access to all segments of society. These include promoting cooperatives, nationalisation, branch expansion, and establishing institutions like RRBs, NABARD, NHB, SIDBI, and EXIM Bank.

To ensure ease of access to people, the central bank has created various structures and made regulatory interventions such as digital payments and a national strategy for financial inclusion. As part of this strategy, the RBI looks to ensure that every village with more than 500 households has a banking outlet within a five-kilometer radius.

To encourage financial inclusion in India, the RBI has taken several measures and different strategies. These include simplifying loan procedures, promoting collectivism through self-help groups (SHGs) and joint liability groups (JLGs), guaranteeing customer safety and protection, and promoting financial literacy through the establishment of financial literacy centers and multimedia campaigns. The RBI conducts an Annual Financial Literacy Week every year in February to disseminate financial education and awareness throughout the nation.

India has made significant progress in achieving financial inclusion. The number of rural creditors has decreased significantly, while the number of bank branches per lakh of population has increased. Additionally, the percentage of adults with bank accounts has risen to over 90%, and the gender gap in account ownership has dropped below 6%.

Despite these achievements, there are still areas of unfinished work, particularly with regards to access, usage, and quality of financial services. For example, 28% of rural households are still excluded from the formal financial system, and 80% of Micro, Small, and Medium Enterprises (MSMEs) lack access to formal finance. Therefore, the focus needs to shift towards the demand side of financial inclusion to improve usage and quality. New strategies may be required to address the remaining challenges.

To achieve financial inclusion, a combination of strategies is necessary. Existing structures must be made more efficient, and new structures like farmer-producer organisations should be established. The use of technology, including fintech and agritech, is important, but precautions must be taken to ensure safe and secure transactions. It is also crucial to increase formalisation, particularly in agriculture and MSMEs.

Reforming farm laws and mainstreaming agritech can assist small farmers who are unable to borrow from formal financial institutions. Regarding MSMEs, formalization, improving quality and technology, and scaling up their size can help them sell more effectively in the markets. Additionally, financial education, financial literacy, and customer protection remain pivotal to encourage financial inclusion.

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Govinda Rajulu Chintala, Former Chairman, NABARD

In India, many individuals, particularly rural women, were excluded from banking services. To address this issue, the self-help group (SHG) movement was introduced. This proved critical in inculcating banking ethics and habits among underprivileged groups. The lack of banking skills, habits, and knowledge was a significant hindrance for women in accessing banking services. The SHG movement enabled women to learn how to save and rotate money, calculate interest rates, and become beneficiaries of the banking system.

The Prime Minister’s vision of financial inclusion encompasses access, inclusion, connectivity, ease of living, opportunity, and accountability. The PMJDY and the SHG movement, initiated by the GOI, RBI, and NABARD, facilitated the inclusion of women in the formal banking sector through SHGs and microfinance institutions. Women are observed to be the most suitable borrowers due to their financial prudence and sense of familial responsibility.

The integration of technology and the utilization of government initiatives such as Aadhaar, PMJDY, and JAM enhanced the process of financial inclusion and made it more accessible. SHGs have enabled 120 million women to enter the banking system, but it is uncertain how many women in the country’s workforce have access to credit. However, SHGs and MFIs are working on providing credit based on social collateral, resulting in significant progress towards achieving financial inclusion.

The Indian banking and para banking system’s achievement in providing credit to the underserved population without requiring collateral is a laudable approach. The success of the financial inclusion concept is evident in the high loan recovery rate of 96 to 98 percent. However, financial inclusion efforts are still inadequate in certain states, such as Uttar Pradesh, Chhattisgarh, and parts of Gujarat, Rajasthan, and Maharashtra.

Recent advancements in mobile and fintech that have made remittances easier and more affordable are commendable efforts. The institutional network supporting these developments should be appreciated for their contribution to financial inclusion.

Promoting financial literacy and inclusion has proven fruitful in facilitating financial transactions, reflected in the PMJDY campaign and UPI system. Nonetheless, directing attention towards generating sources of income, especially for individuals who are economically disadvantaged, by providing them with greater loan amounts and access to employment opportunities and credit remains important.

There are three key aspects of financial inclusion in India. The first pertains to NABARD’s Livelihood and Enterprise Development Programmes (LEDPs), which imparts training to SSG women to enable them to undertake sustainable livelihood activities. The second is an end-to-end solution mechanism for farmers and rural areas, particularly in agriculture, such as Kisan Credit Cards and Farmer Producer Organizations (FPOs). Lastly, NABARD’s Nav Sanrakshan, a credit guarantee subsidiary for FPOs, serves as a safety mechanism for financial inclusion.

The Trust (Vivadh se Viswas) platform can be used for resolving issues of MSMEs, and similar platforms can be replicated for agriculture. It is crucial that institutions ensure proper crediting and resource allocation for individuals brought into the financial inclusion network. Microfinance and financial inclusion have vast potential in India, where a large number of people lack access to credit. Providing necessary resources to them could lead to significant economic growth and prosperity in the country.

Meenakshi Rajeev, RBI Chair Professor, Institute for Social and Economic Change

Financial inclusion is an essential aspect of long-term economic growth. Lack of financial inclusion can have adverse effects, such as increasing child labor and decreasing educational outcomes. Financial inclusion benefits not only entrepreneurs but also smaller entrepreneurs and the poorest population. The Rangarajan Committee of 2008 identified four significant components of financial inclusion: savings, insurance, remittances, and credit, with credit being the most critical. Remittance is also crucial in countries with a large number of migrant laborers who remit their funds.

Data from various field surveys and studies done for NABARD, RBI, and other institutions emphasise the importance of access and usage in financial inclusion. There is a stark difference in the nature of financial exclusion in rural and urban areas as cooperatives play a pivotal role in providing access to the poorest sections of the rural population. Therefore, rural-urban division and the role of cooperatives should be considered while constructing financial inclusion indices.

An overview of the current status of financial inclusion in India shows that there has been an increase in access to financial services in both urban and rural areas, but the gap between the two is widening. While there have been advancements in banking access, there is still limited growth in saving and investment. Improvements were observed in insurance and credit access for farmers, but certain groups still have gaps in coverage. Scheduled tribes and female-headed households have less access to credit compared to male-headed households.

Financial inclusion programs need to give special attention to different categories within the population, such as female-headed households and scheduled tribes. The dependence on moneylenders is an essential indicator of financial inclusion, and while financial inclusion has reduced this dependence, a significant proportion of the population still relies on moneylenders, particularly among tribes.

Cooperative banks are better than commercial banks at reaching out to poorer farmers. India’s progress in banking access shows improvements in account ownership, but there is a need for improvement in debit card ownership and inactive accounts. In this mobile money accounts and agent banking can play important roles in addressing these areas of improvement.

The self-help group has helped women to access credit. However, there is still a need to enhance the coverage for women and landless farmers. Further, basic financial literacy is crucial, and secondary education is necessary for access to financial services. Therefore, it remains important that financial literacy should increase for marginalized sections.

Siddhartha Sanyal, Chief Economist, Bandhan Bank

India has made commendable progress in financial inclusion over the past two decades, including credit, deposits, savings, insurance, and remittance. However, as the industry transitions into a new phase of financial inclusion, version 2.0, with digital technology and data, a cautious approach is needed. Although, significant strides have been made, there are still areas that need to be addressed.

The microfinance sector faces difficulties, but digital technology and data analysis offer potential for efficiency and knowledge of customers. However, financial and digital literacy needs to be enhanced to participate effectively in financial inclusion. A well-rounded strategy is necessary, combining digital technology and local expertise, with continuous training for industry participants and a focus on long-term sustainability over immediate gains. Simplicity in products and services is also important.

Personnel face challenges in providing hands-on aid to clients, so allocating resources towards education and training is essential. A systematic approach is necessary to educate individuals on financial and digital literacy, with it being proposed as a viable cost for corporate social responsibility initiatives. The advancements made in the industry during the past two decades provide a renewed push for digital technology and data analytics. However, it is important to contain digital and financial fraud and have a long-term focus on employee and customer training.