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Relevance: GS Paper III (Economy)

Source:

Meaning of financial inclusion

Financial inclusion is a process that enables improved and better sustainable economic and social development of the country. It focuses on raising the standard of living of the underprivileged people in the society with the objective of making them self-sufficient and well informed to make better financial decisions. Also, it acknowledges the participation of the low-income groups based on the extent of their access to financial services in economic growth.

Historical Developments

• In India, financial inclusion exercise explicitly started with the nationalization of State Bank of India in 1955.
• The concept of priority sector lending became important by 1974 which implied directed lending to unbanked areas.
• Since 2005, a number of concerted measures to enhance financial inclusion have been initiated. These measures include:
  • Self Help Group-bank linkage programme,
  • Use of business facilitators and correspondents,
  • Easing of ‘KnowYour-Customer ’ (KYC) norms,
  • Electronic benefits transfer,
  • Use of mobile technology,
  • Opening ‘no-frill accounts’ and
  • Emphasis on financial literacy.
• Other measures initiated by the Government to support financial inclusion include opening customer service centres, credit counselling centers, Kisan Credit Card, National Pension Scheme-Like, Mahatma Gandhi National Rural Employment Guarantee Scheme and Aadhaar scheme.
• Recent initiatives include;
  • Pradhan Mantri Jan Dhan Yojana (PMJDY) to widen access to various basic financial services.
  • Micro Units Development Refinance Agency (MUDRA) to focus on providing credit to small entrepreneurs.
  • Atal Pension Yojana (APY) to provide old age income security to the working poor in the unorganized sector;
  • Jeevan Jyothi insurance scheme offering life insurance; and
  • Suraksha insurance scheme providing insurance to cover death or disability on account of an accident.

Challenges in the path of financial inclusion

• Some Accounts under PMJDY are not operative–In some cases, bank accounts are not operative due to lack of funds with account holders. The cost-effectiveness aspect, given low balances in accounts, in implementing technological advancements is a matter of concern.
• Lack of financial literacy – The rural households do not have adequate financial literacy resulting in lack of awareness of many financial services provided by financial institutions.
• Too large volumes of Accounts – There is a need for technical and institutional infrastructure for e-payment systems to service a large number of new and existing accounts.
• Need for Manpower planning – There is a requirement of sufficient technical skill development and training for banks and institutional staff.
• Secure Environment – The security of electronic transactions is a matter of concern especially with a large number of new accounts, in remote parts of India.
• Ease of transaction – Lack of ease in transaction related activities in banks is clearly demonstrated by the repetitive behavior of rural households’ persistence in taking loans from the money lenders.
• Need for greater use of technology – On the operational side, despite the convenience offered by ATMs in providing banking services, the debit card penetration continued to be low with only 30 per cent of deposit account holders having a debit card.
• Demand Side Factor – Factors such as lower income or asset holdings, lack of awareness about the financial products, perceivably unaffordable products, high transaction costs, products which are not convenient, inflexible, and not customized to the rural sector income pattern are a major barrier for gaining access to the financial system.
• Costs and risks in using technology – Costs in terms of increasing expenditure on IT deployment and risks in terms of monetary loss, data theft and breach of privacy are a concern. Thus, banks need to be extremely cognizant of such risks.
• Cyber Security – Nearly 31 crore new accounts have been opened in previous 3 years under PMJDY and nearly 80 percent of these are first time users. This can be a threat to cyber security especially when know-your-customer norms have been diluted.

Way forward

• In view of the increasing complexity of financial inclusion, there may be a need to consider a roadmap as well as a regulator.
• The issue of digitization, necessary for achieving higher financial inclusion, is serious and needs analysis.
• India has a low level of literacy of about 70 per cent, with English literacy of not more than 10 per cent of the population. Given the fact that all electronic devices have English numerals and all communication on digital banking is also in English, there is the natural barrier to completely digitalize Indian economy during the immediate period.
• Low volume of business in rural shops, shopping sheds, rural makeshift kiosks may not justify the cost of installing equipment to read and safely secure the data on plastic money.
• The cost of providing equipment in remote parts of the country and ensuring seamless connectivity at the affordable cost would be another challenge that would need to be addressed.
• The use of e-money, at present, is largely restricted to urban areas, and more educated youth from rural areas. Even if there are smartphones in the rural areas, these are restricted to only one member of the family which implies that banking activities, private in nature, would be restricted. Therefore, it may be helpful if a long-term plan with cost implications and a stipulated timeline is prepared to decide on various aspects of building a digital economy.
• To rapidly digitalize India, probably, there is a need for a Committee to understand the problem, become aware of the challenges, and then prepare a roadmap to achieve success.
• As the government has addressed the issue of smart cities by announcing a list of select 100 cities where technological amenities would be provided in a phased manner, a similar strategy, pilot based projects, and operations, could be adopted for digitalization.
• Though financial inclusion has been pursued by commercial banks for many decades, the focused approach has been missing. It may now be necessary to assign the regulation and supervision of financial inclusion to NABARD, with experience of more than four decades, with clear accountability and responsibility.