Financial inclusion in India has traditionally been equated with the expansion of banking networks and the proliferation of bank accounts for the underserved.
Financial inclusion in India has traditionally been equated with the expansion of banking networks and the proliferation of bank accounts for the underserved.
However, full and effective financial inclusion involves many more levels than just having a bank account. This implies, among other things, access to a comprehensive range of financial services, including savings, loans, insurance and payments – tailored to the different needs of individuals, especially the marginalized and underserved sections of society.
Hello! You are reading a premium article
However, full and effective financial inclusion involves many more levels than just having a bank account. This implies, among other things, access to a comprehensive range of financial services, including savings, loans, insurance and payments – tailored to the different needs of individuals, especially the marginalized and underserved sections of society.
India's journey towards financial inclusion and education has made significant progress with the Pradhan Mantri Jan-Dhan Yojana (PMJDY). Nine years after launch, no-frills bank accounts continue to see a steady increase and have cash balances of ₹2.03 Lakh Crore from 2023. 35.9 million new PMJDY accounts were opened in FY23, up from 28.6 million in FY22 and a little less than 38.7 million in FY21.
Despite this notable increase, a large number of accounts remain inactive or face duplication, highlighting the need for more informed financial literacy and engagement strategies.
Between 2014 and 2017, India saw a remarkable 26 percentage point increase in account holders, largely attributed to PMJDY, compared to a global increase of just 6.57 percentage points during the same period.
The 2021 Global Findex data provides an insightful snapshot of the evolving financial inclusion landscape in India, marked by significant digital adoption and changing savings and lending behavior. According to Findex, India saw a slight percentage decline in account ownership from 80% to 77% from 2017 to 2021, underscoring the need for another round of intensified financial inclusion efforts. This period also saw a worrying decline in savings at financial institutions, falling from 20% in 2017 to 13% in 2021 across all population groups.
Comprehensive financial inclusion embodies diverse access to financial services tailored to the different needs of the population. After China, India has the second largest proportion of the world's population with a total of 130 million people who do not have access to formal banking services.
The mere existence of a bank account does not guarantee financial inclusivity. A 2017 World Bank report highlighted that about 48% of bank accounts in India were inactive, highlighting the gap between account ownership and meaningful financial participation. The presence of dormant accounts and reluctance to fully engage in financial markets are often due to inadequate financial knowledge, the need for ongoing investor support, the simplicity of financial products and unbiased expert advice.
So how can we encourage more active use of these accounts?
Access to credit remains a crucial pillar as the MSME sector and low-income households are often affected by the high costs of informal lending despite the availability of microfinance options. Likewise, the low insurance penetration highlights the gaps in risk management and protection against unforeseen life events. Investment and wealth creation opportunities through investment funds, pensions and government savings plans represent another dimension of financial inclusion and enable individuals to secure their financial future.
Technological advances in recent years have revolutionized the banking sector, and almost all financial institutions now use technology to expand and improve their services and products. Additionally, the RBI’s Central Bank Digital Currency (CBDC) Pilot signals a major step towards digital currency adoption. This has promoted financial inclusion through the rise of digital transactions. However, digital literacy and access underscore the need for a more inclusive digital financial landscape.
As digital financial services rapidly penetrate our lives, a large number of inactive accounts requires a targeted financial education campaign with the availability of simple financial products and unbiased financial advice to maximize the financial well-being of the majority of the population.
Improved financial inclusion and financial literacy are critical to enabling individuals to navigate financial systems, access credit and use digital platforms effectively. Tailoring financial products to the specific needs of diverse groups, including women, small business owners and rural communities, remains unfinished business.
Strengthening digital infrastructure, facilitating access to fintech solutions and innovative and inclusive regulatory frameworks have become essential parts of our financial ecosystem, the cornerstone of deepening financial inclusion and ensuring that financial services are accessible, affordable and relevant to all parts of society are.
The National Financial Inclusion Strategy (NSFI) 2019-24 sets out the vision and key objectives of financial inclusion policy in India, with a focus on improving digital financial inclusion. NSFI is tasked with promoting financial literacy in the country using the National Strategy for Financial Education (NSFE) “5Cs Approach” which includes content enhancement, capacity building, community-led model, effective communication strategy and collaboration strategy includes taking further steps in this direction.
The new generation, experiencing increasing global financial changes and challenges, faced with an overload of information and social media pressure, is unclear about financial planning. How can we make financial education more engaging and impactful for them?
An online study suggests that over two-fifths of Generation Z and Millennials suffer from distorted financial perceptions. In addition to age-old methods of financial inclusion and providing financial access to the general population, a targeted approach to providing clarity or financial planning for youth can be helpful.
Adopting a 6th C class or group-focused approach to NSFE strategy will help address the unique financial challenges faced by specific groups, such as: E.g. housewives, senior citizens/pensioners, students/young people and school children.
How can we build deeper trust in financial institutions and financial markets? A simple but efficient complaints system, improved trust-building measures and regulatory reforms can address problems such as misinformation and fraud that undermine public trust.
Addressing these issues requires concerted efforts to effectively prevent fraud, early detection and effectively communicate the actions taken by regulators. Establishing a Financial Redress Agency as a unified agency for all financial sectors, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC), will improve grievance redressal and increase confidence to remain in the market.
The vital role of financial advisors, providing impartial advice with clear disclosures, is becoming increasingly important. Unrealistic or biased advice from “finfluencers” and advisors can cause potential financial investors to stay away from the financial markets.
Financial inclusion is a multi-dimensional challenge in India. India's progress in financial inclusion and education underscores a comprehensive, multi-faceted approach to ensuring equitable access to financial services. However, the presence of inactive accounts and the need for a renewed focus on financial education highlight areas where further development is required.
There is an urgent need to combine financial inclusion efforts with comprehensive sustained financial education efforts and establish a unified grievance redressal system. This strategy will support India's economic growth by ensuring that financial services are accessible to all citizens.
(The author is a former Indian Economic Service officer and IEPF Chairman at the National Council of Applied Economic Research. Views are personal.)
Comments are closed.