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Financial inclusion

Financial inclusion is defined as the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses gain access to appropriate, affordable, and timely financial products and services which include banking, loan, equity, and insurance products. Financial inclusion efforts typically target those who are unbanked and underbanked, and directs sustainable financial services to them. Financial inclusion is understood to go beyond merely opening a bank account; it is possible for banked individuals to be excluded from financial services. Having more inclusive financial systems has been linked to stronger and more sustainable economic growth and development and thus achieving financial inclusion has become a priority for many countries across the globe.

In 2018 it was estimated that about 1.7 billion adults lacked a bank account. Among those who are unbanked a significant number were women and poor people in rural areas and often those who are excluded from financial institutions face discrimination and belong to vulnerable or marginalized populations.

While it is recognized that not all individuals need or want financial services, the goal of financial inclusion is to remove all barriers, both supply side and demand side. Supply side barriers are those which stem from financial institutions themselves and often indicate poor financial infrastructure and include lack of nearby financial institutions, high costs to opening accounts, or documentation requirements. Demand side barriers refer to aspects of the individual seeking financial services and include poor financial literacy, lack of financial capability, or cultural or religious beliefs that impact their financial decisions.

Initiatives by Country

Financial Inclusion in India

History

The concept of financial inclusion, extending financial services to those who typically lack access, has been a goal for the Government of India since the 1950s.

The nationalization of banks, which occurred from the mid 1950s to the late 1960s, culminating in 1969 with the nationalization of 14 commercial banks by Prime Minister Indira Gandhi, brought banking facilities to previously unreached areas of the country. The “branching” of banks into rural areas increased lending for agriculture and other unserved rural populations and Indira Gandhi spoke of it as a tactic to “accelerate development” and to address poverty and unemployment.

The Lead Bank Scheme followed nationalization as a way to coordinate banks and credit institutions by districts to more comprehensively ensure that rural areas had their credit needs met. In 1975, the Government of India followed this with efforts to specifically reach rural areas by establishing Regional Rural Banks (RRBs) meant to exclusively meet demand in the rural economy and the number of RRBs has significantly increased over the years.

By the early 2000's, the term 'financial inclusion' was being used in the Indian context. In 2004 the Khan Commission, created by the Reserve Bank of India (RBI), investigated the state of financial inclusion in India and laid out a series of recommendations. In response, RBI Governor Y. Venugopal Reddy, expressed concern regarding the exclusion of millions from the formal financial system and urged banks to better align their existing practices with the objective of financial inclusion in both his annual and midterm policy statements. The RBI has continued in its efforts in conjunction with the Government of India to develop banking products, craft new regulations, and advocate for financial inclusion.

Since financial inclusion was established as a priority for the GOI and RBI, progress has been made. Mangalam, Puducherry became the first village in India where all households were provided banking facilities. States or union territories such as Puducherry, Himachal Pradesh and Kerala announced 100% financial inclusion in all their districts. The Indian Reserve Bank vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy, low income savings and lack of bank branches in rural areas continue to be a roadblock to financial inclusion in many states and there is inadequate legal and financial structure.

Financial Sector Strategies

In India, RBI has initiated several measures to achieve greater financial inclusion which rely on efforts of the financial sector.

No Frills Accounts (NFAs), now known as Basic Savings Bank Deposit Accounts (BSBDAs) can be opened with zero or minimal balances, removing a cost barrier to banking. Banks are also meant to charge minimal overdraft fees on NFAs. The RBI continues to change and relax policies regarding these accounts in an effort to better serve bank customers.

Know-your-customer (KYC) requirements for opening bank accounts were relaxed for small accounts in August 2005, eliminating a documentation barrier to banking. The new procedure only requires an introduction by an account holder who has been subjected to the full KYC screening. Additionally, banks were permitted to accept more easily produced forms of documentation for proof of identity and address.

The Business Correspondents (BC) Model was launched in January 2006, when the RBI permitted banks to engage intermediaries in the banking process. This model enables banks to service neglected areas by allowing intermediaries to facilitate transactions and deliver other banking services directly. Originally, a fairly limited number of entities, including NGO's and certain microfinance institutions were eligible to act as BCs, however in 2010 the list was expanded to include for-profit companies In 2018, operators of Common Service Centers(CSCs) which work with local governing gram panchayats also began working as BCs to further improve penetration of banking services.

Expanding financial technology or fintech, has been proposed as an effective strategy to achieve financial inclusion. While incorporation of technology does pose some risks, it is being used to deliver banking services to those in rural and remote areas who are typically unserved. Banks have been advised to make effective use of information and communications technology (ICT), to provide banking services to people directly through the BC model where the accounts can be operated by even illiterate customers by using biometrics, thus ensuring the security of transactions and enhancing confidence in the banking system. In 2018 the World Bank and International Monetary Fund (IMF) launched the Bali Fintech Agenda to provide a framework for domestic policy discussions around deepening access to financial services in a variety of different contexts.

Unique credit cards are now offered by banks, the most popular being General Purpose Credit Cards (GCCs), and Kisan Credit Cards. These unique cards offer credit to those in rural and semi-urban areas, farmers, and others with adjusted collateral and security requirements with the objective of providing hassle-free credit.

Electronic benefit transfer (EBT) is being implemented by banks at the advice of the RBI with the goal of reducing dependence on cash, lowering transaction costs, and address corruption.

Increasing the number of rural banks continues to be a priority for the RBI. In 2009, the RBI relaxed previous policies requiring authorization before opening new branches in the hopes that simplified authorization would increase branches in underserved areas. Beginning in 2011 the RBI required 25% of new branches opened in a given year be in unbanked rural areas centers to ensure a more even spread of banking facilities.

The self-help group (SHG) linkage model has also been proposed to improve financial inclusion by linking community groups to the formal banking sector through government programs, credit cooperatives, NGO's, or other microfinance institutions. Group-based models in which members pool their savings have also been seen as tools for social and economic empowerment, particularly when women are leaders and participants.

Government Policy Strategies

The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is meant to provide supplemental employment at a guaranteed minimum wage and facilitate financial inclusion to empower women and rural laborers. While achieving financial inclusion is not its main goal, the program directly deposits wages into bank accounts as a way to limit corruption, speed delivery of benefits, and connect wage laborers to bank accounts.

The Pradhan Mantri Jan Dhan Yojana policy scheme was announced by Prime Minister Narendra Modi in his 2014 Independence Day Speech and launched in August of 2014 in an effort to provide "universal access" to banking through the creation of basic banking accounts which come with other basic financial services. Modi informed all Indian banks of the initiative and declared it a national priority. On the inauguration day of the scheme, 1.5 crore (15 million) bank accounts were opened and since then, more than 18 million bank accounts have been created.

In 2016, the Government of India instituted a sweeping demonetisation policy in an attempt to stop corruption and the flow of black money. This move forced people to deposit their money into banks or see its value evaporate, with the goal of integrating citizens into a cashless and taxable economy and banking system. While India has seen new bank accounts continue to open in the wake of this policy change, and an overall increase in use of digital payment systems and other financial services, the policy change caused an extreme disruption to the financial system and debate continues on its efficacy.

Measuring Financial Inclusion

Readily available data outlining gaps in access and contextualizing the situation of financial inclusion is necessary for both service providers and policy makers looking to achieve financial inclusion. Several organizations conduct surveys to measure indicators of financial inclusion and collect both supply and demand side data. MIX is one platform which produces data driven reports to track progress towards financial inclusion across the globe.

In 2013, Finance Minister of India, P. Chidambaram launched the CRISIL Inclusix, an index to measure the status of financial inclusion in India. CRISIL, India's leading credit rating and research company is collecting data from 666 districts in India and ranking on a scale from 0 to 100 based on four parameters of financial services. CRISIL publishes semi-frequent reports based on their findings with regional, state-wise, and district-wise assessments of financial inclusion

Some key conclusions from the 2018 report are:

• The all-India CRISIL Inclusix score of 58.0 is above average as of April 2016, this is a significant improvement from 35.4 in 2009.
• Deposit penetration is the key driver of financial inclusion– the number of deposit accounts (1646 million), is almost eight times the number of credit accounts (196 million).
• The top three states are Kerala, Karnataka and Andhra Pradesh.

Controversy

Financial inclusion in India is often closely connected to the aggressive micro credit policies that were introduced without appropriate regulations, oversight, or consumer education policies. As a result, consumers quickly became over-indebted to the point of committing suicide and lending institutions saw repayment rates collapse after politicians in one of the country's largest states called on borrowers to stop paying back their loans. The crisis threatened the existence of the $4 billion Indian microcredit industry, has been compared to the subprime mortgage crisis in the United State. The crisis serves as a reminder of the necessity of appropriate regulatory and educational frameworks and it remains a challenge to separate microcredit from the large and complex field of financial inclusion.