THE CONTEXT:In a diverse country like India, financial inclusion is a critical part of the development process. The state of financial inclusion has improved considerably over time. However, financial inclusion hasn’t reached the poorest of the poor and there exist many bottlenecks and challenges which need immediate attention and the recent pandemic has raised the concerns related to financial inclusion. This article explains the progress made so far and what more can be done in the arena of financial inclusion.

FINANCIAL INCLUSION:
Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.
• Financial inclusion has been identified as an enabler for 7 of the 17 Sustainable Development Goals.
• The G20 committed to advancing financial inclusion worldwide and reaffirmed its commitment to implement the  G20 High-Level Principles for Digital Financial Inclusion.
• The World Bank Group considers financial inclusion a key enabler to reducing extreme poverty and boosting            shared prosperity.

“Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost.” The Committee on Financial Inclusion
Chairman: Dr. C. Rangarajan.
“Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products.” The Committee on Financial Sector Reforms Chairman: Dr Raghuram G. Rajan.

FINANCIAL INCLUSION INITIATIVES

JAN DHAN-AADHAR-MOBILE (JAM) TRINITY
• The combination of Aadhaar, PMJDY and an increase in mobile communication has transformed how citizens access government services.
• According to estimates in August 2021, the total number of Jan Dhan scheme beneficiaries was more than 430 million.
• Aadhaar has significantly altered the concept of individual identity, resulting not only in a secure and easily verifiable system but also in an easy-to-obtain system that will aid in the financial inclusion process.
• The government has also launched a number of flagship schemes to promote financial inclusion and provide financial security in order to empower the country’s poor and unbanked citizens.
• PAHAL (Pratyaksh Hanstantrit Labh) or the Direct Benefit Transfer of LPG (DBTL) scheme is a well targeted system of subsidy delivery to LPG consumers aimed at rationalizing subsidies, based on an approach to cut subsidy leakages, but not subsidies themselves. SAHAJ Scheme is also a component under PAHAL which enables people to apply for LPG connections online.
• With the outbreak of the COVID-19 pandemic and the imposition of lockdown and social distancing norms, DBT emerged as a boon in providing succour and relief to millions of citizens whose livelihood was impacted. At present it disburses benefit for 420 schemes under 56 ministries.
• The Pradhan Mantri Mudra Yojana, the Stand-Up India Scheme, the Pradhan Mantri Jeevan Jyoti Bima Yojana, the Pradhan Mantri Suraksha Bima Yojana, and the Atal Pension Yojana are also among them.
FINANCIAL SERVICES EXPANSION IN RURAL AND SEMI-URBAN AREAS
• The Reserve Bank of India (RBI) and NABARD have launched initiatives to promote rural financial inclusion.
• These include the establishment of bank branches in remote regions.
• Kisan Credit Cards (KCC) are being issued.
• Self-help groups (SHGs) are linked with banks.
• Increasing the number of ATMs.
• Business correspondent model of banking.
DIGITAL PAYMENTS PROMOTION (DIGITAL FINANCIAL INCLUSION)
• In comparison to the past, digital payments have become more secure thanks to NPCI’s strengthening of the Unified Payment Interface (UPI).
• The Aadhar-enabled payment system (AEPS) allows an Aadhar-enabled bank account (AEBA) to be used at any location and at any time through the use of micro ATMs.
• The payment system has become more accessible as a result of offline transaction-enabling platforms such as Unstructured Supplementary Service Data (USSD), which allows users to use mobile banking services without the need for an internet connection, even on a basic mobile handset.
IMPROVING FINANCIAL LITERACY
• The Reserve Bank of India has launched a project called “Project Financial Literacy.”
• The project’s goal is to disseminate information about the central bank and general banking concepts to a variety of target groups, including school and college children, women, the rural and urban poor, military personnel, and senior citizens.
• ‘Pocket Money’ is the flagship programme of the Securities and Exchange Board of India (SEBI) and the National Institute of Securities Markets (NISM) aimed at increasing financial literacy among school students.
• The goal is to teach students about the value of money and the importance of saving, investing, and financial planning.

RECENT EXPERIENCES WITH FINANCIAL INCLUSION

INCREASED ACCESS TO BANKS
• According to the World Bank’s Global Financial Inclusion Database or Global Findex report (2017), 80% of Indian adults have a bank account against the 53% estimated in 2014.
• The Findex 2017 report also estimates that 77% of Indian women have bank accounts, against 43% in 2014.
MULTIPLIER EFFECT
• These initiatives have brought about major changes to increase the last-mile connectivity of financial services to its people.
• By providing access to financial resources to underprivileged and marginalised sections of society, financial inclusion has the potential to reduce poverty, and create jobs, among others.
ENHANCING ACTIVE PARTICIPATION OF CITIZENRY
• Earlier, private institutions did not engage with the poor as customers on a significant scale.
• This has now changed, and there has been active participation of the private players (payment banks like Paytm, airtel money and Jio money), as they have also realised that bringing the poor into the financial net is beneficial to their business models as well.
INTEGRATION OF FINANCIAL SERVICES
• The convergence of the JAM trinity with the Direct Benefit Transfer (DBT) scheme has largely been successful.
• Due to this, there has been a significant improvement in terms of targeted and accurate payments.
• It has also helped in weeding out duplication of entries and bringing down the reliance on cash mode of payments.

CHALLENGES TO FINANCIAL INCLUSION

DIGITAL DIVIDE
The following are the most common barriers to the adoption of digital technology that could promote financial inclusion:
• Inadequate availability of appropriate financial products.
• The inability of stakeholders to use digital services due to a lack of skills.
• Problems with infrastructure.
• Low-income customers who cannot afford the technology needed to access digital services.
IMPLEMENTATION ISSUES
• The Jan Dhan scheme resulted in the creation of a large number of dormant accounts that never saw any banking transactions.
• All such activities impose costs on the institutions, and thus, massive operational costs proved to be detrimental to the overall goal.
• To avoid these unintended consequences, it is critical that all stakeholders participate in such programmes with proper intent and not just for the sake of participating.
ACCESS TO BANK ACCOUNTS IS NOT UNIVERSAL
• Since bank accounts provide access to all financial services it is imperative for every citizen to have a bank account.
• However, according to a World Bank report, approximately 190 million adults in India do not have a bank account, making India the world’s second-largest unbanked population after China.
• The financial Inclusion Index (FI-Index) is composed by the Reserve bank of India based on multiple parameters to reflect the broadening and deepening of financial inclusion in the country. The FI Index is published annually in July for the financial year ending previous March. The annual FI-Index for the period ending March 2021 is 53.9 as against 43.4 for the period ending March 2017. ( Look for FI-Index in July 2022)
INFORMAL AND CASH-DOMINATED ECONOMY
• India has a heavily dominated cash economy, which makes digital payment adoption difficult.
• Furthermore, the International Labour Organization (ILO) estimates that approximately 81 per cent of all employed people in India work in the informal sector.
• The combination of a huge informal sector along with a high dependence on cash mode of transaction poses an impediment to digital financial inclusion.
INADEQUATE CREDIT PENETRATION
• The lack of information available to formal creditors to determine creditworthiness is one of the main constraints in providing credit to low-income households and informal businesses. As a result, the cost of credit is high.
• As a result, the number of loan accounts per 1,000 adults in India was 154 in 2016. This is quite low when compared to comparable economies such as the BRICS nations.
GENDER INEQUALITY IN FINANCIAL INCLUSION
• According to the 2017 Global Findex database, 83 per cent of males over the age of 15 in India had a financial institution account in 2017, compared to 77 per cent of females.
• This is due to socioeconomic factors such as men having greater availability of mobile handsets and internet data facilities than women.

TECHNOLOGY AND FINANCIAL INCLUSION

AADHAAR AND THE INDIA STACK ARCHITECTURE

• It has addressed the issue of de-duplicated identity. While there are concerns about privacy, the issue of connectivity in remote areas, about exclusion and false rejections, it is to be accepted that there is a widespread perception and acceptability that this is a good identity document.

ADDRESSING THE INFORMATION ASYMMETRY

• Over a period of time, the transactions of the poor have been captured both in the books as well as in the books of Self Help Groups the Microfinance Institutions, thereby giving a transaction trail. This transaction trail can be seen as a proxy for future cash flows for a banker to take a call on the loans. With the need to upload the credit data to the four credit bureaus and the initiative of a public credit registry, the issue of information asymmetry is addressed by the use of active data capture specific to the loan activities.

INTEROPERABILITY

• .The computerisation of banks, interoperability between banks and a solid payments and settlements backbone provided by the National Payments Corporation of India (NPCI) has made contactless remittances as well as small ticket cashless transactions possible.
• .The rollout of technology for payments through mobile using QR code and making interoperability free for the clients has given a ubiquitous digital push.

• WHETHER THE PANDEMIC BOOSTED FINANCIAL INCLUSION IN INDIA?

 YES 

• The spread of digital financial services during the pandemic is welcome news. Digital financial systems help alleviate poverty by increasing the speed, security, and transparency of transactions. They create space for development of sustainable financial products that can cater to low-income and vulnerable groups by removing barriers such as lack of identification, formal income, and geographical distance.
• The lockdown and social distancing imposed by the authorities to contain the spread of the virus have led to a significant increase in the value and number of online transactions. The pandemic has revolutionize digital financial services. Advances in digital money, online banking, and fintech services have significantly impacted small businesses and low-income households. The ability of digital financial services to increase financial inclusion and thus economic growth is a potential boon.

  NO

• In times of crisis, when the sources of income are restricted, the poor households were vulnerable to approach unscrupulous moneylenders for their financial needs. To tackle the crisis, these households are likely to adopt unfavorable survival mechanisms such as liquidation of assets, a decline in nutritious food consumption, and abortion of healthcare services.
•  Amid the crisis, the unavailability of adequate financial services may exacerbate their economic hardships. The inaccessibility of financial services to the poor and informal sector workers has lead these households into a poverty trap.

THE ANALYSIS:
1. Financial inclusion is an important keystone of the socio-economic development of a country as well as a significant enabler of poverty alleviation & boosting prosperity. Bringing every citizen under the formal banking system, encouraging digital payments and making financial services easily accessible and affordable for people across the country are some key aspects of financial inclusion.
2. According to SBI Research report on Financial Access Survey, India has stolen a march in financial inclusion with the initiation of PMJDY accounts since 2014, enabled by a robust digital infrastructure, careful recalibration of bank branches and use of the Banking Correspondent model.
3. Though the pandemic has been hard on most of the population it has provided a significant boost to digital banking and financial inclusion but still there a long road ahead.

THE WAY FORWARD:
1. While India has made great strides in the journey toward financial inclusion, recently with the advent of digital payment systems, there are notable digital divide and financial literacy concerns in the country. The most common barriers such as lack of skills among the stakeholders to use digital services, infrastructural issues, teething problems between various systems, and low-income consumers’ inability to afford the technology required to access digital services shall be addressed.
2. In terms of advancing financial literacy, the government’s ongoing efforts under Pradhan Mantri Gramin Digital Saksharta Abhiyan (PMGDISHA) (which aims to train one person per household i.e., 6 crore persons in rural areas on digital literacy) were suffering from a paucity of funds. Against this backdrop, the Parliamentary Standing Committee on IT submitted its report on the review of the National Digital Literacy Mission (NDLM) in March 2022, with a host of recommendations. Such recommendations shall be discussed and debated to have a better policy and implementation.
3. Leveraging JAM Trinity: Technology should be used to improve the assessment of creditworthiness for households and informal businesses. With the adoption of appropriate technology a new data-sharing framework (using Jan Dhan and Aadhaar platforms), to enable easier access to credit shall be framed.
4. Need for Data Protection Regime: In addition to greater digitization, there is also a need to strengthen cyber security and data protection regime in the country.
5. Leveraging Differentiated Banks: Differentiated Banks like Payment banks and small finance banks can be leveraged to scale up payments systems in underserved areas.
6. Promoting USSD for Rural Areas: Payments through the USSD channel should be promoted (by reimbursing the charges incurred in the USSD process), as they have an advantage over the internet in that it can also cover a large proportion of non-smartphone users. In India, USSD can be particularly useful in rural areas where some segments still do not have reliable access to the internet.

THE CONCLUSION:Being able to have access to a transaction account is the first step toward broader financial inclusion since a transaction account allows people to store money, and send and receive payments. A transaction account serves as a gateway to other financial services, which is why ensuring that people nationwide can have access to a transaction account continues to be an area of focus. For the success of financial inclusion in India, there has to be a multidimensional approach through which existing digital platforms, infrastructure, human resources, and policy frameworks are strengthened and new technological innovations should be promoted. If adequate measures are taken to tide over the existing problems, financial inclusion has the potential to amplify the benefits of economic growth to the poor.

MAINS PRACTICE QUESTIONS:
1. Discuss various challenges of financial inclusion for the Indian economy. Also mention steps taken by the Indian government toward financial inclusion.
2. Even after 70 years of independence, a large section of the Indian population still remains unbanked. This malaise has led to a generation of financial instability and pauperism among the lower-income group. Suggest measures to expand the financial inclusion net in India.
3. While India has made great strides in the journey towards financial inclusion recently with the advent of digital payment systems, there is notable digital divide and financial literacy concerns in the country. Critically analyse.