What Is Financial Inclusion?: Providing Formal Credit Avenues

Even after 70 years of independence, a large section of Indian population still remains
unbanked. This malaise has led generation of financial instability and pauperism among the
lower income group who do not have access to financial products and services. However, in
the recent years the government and Reserve Bank of India has been pushing the concept
and idea of financial inclusion.
What is Financial Inclusion?

Financial inclusion or inclusive financing is the delivery of financial services at affordable
costs to sections of disadvantaged and low-income segments of society, in contrast
to financial exclusion where those services are not available or affordable.
Why Financial Inclusion in India is Important?

The policy makers have been focusing on financial inclusion of Indian rural and semi-rural
areas primarily for three most important pressing needs:
1. Creating a platform for inculcating the habit to save money The lower income
category has been living under the constant shadow of financial duress mainly because of
the absence of savings. The absence of savings makes them a vulnerable lot. Presence of
banking services and products aims to provide a critical tool to inculcate the habit to save.
Capital formation in the country is also expected to be boosted once financial inclusion
measures materialize, as people move away from traditional modes of parking their savings
in land, buildings, bullion, etc.
2. Providing formal credit avenues So far the unbanked population has been
vulnerably dependent of informal channels of credit like family, friends and

moneylenders. Availability of adequate and transparent credit from formal banking channels
shall allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the
countryside. A classic example of what easy and affordable availability of credit can do for
the poor is the micro-finance sector.
3. Plug gaps and leaks in public subsidies and welfare programmes A considerable
sum of money that is meant for the poorest of poor does not actually reach them. While this
money meanders through large system of government bureaucracy much of it is widely
believed to leak and is unable to reach the intended parties. Government is therefore,
pushing for direct cash transfers to beneficiaries through their bank accounts rather than
subsidizing products and making cash payments. This laudable effort is expected to reduce
governments subsidy bill (as it shall save that part of the subsidy that is leaked) and provide
relief only to the real beneficiaries. All these efforts require an efficient and affordable
banking system that can reach out to all. Therefore, there has been a push for financial
inclusion.
Why is financial inclusion needed in India? - (A Graphical

Representation )
Steps taken by RBI to support Financial Inclusion:

A.Initiation of no-frills account These accounts provide basic facilities of deposit
and withdrawal to accountholders makes banking affordable by cutting down on extra
frills that are no use for the lower section of the society. These accounts are expected to
provide a low-cost mode to access bank accounts. RBI also eased KYC (Know Your
customer) norms for opening of such accounts.
B. Banking service reaches homes through business correspondents The
banking systems have started to adopt the business correspondent mechanism to
facilitate banking services in those areas where banks are unable to open brick and
mortar branches for cost considerations. Business Correspondents provide affordability
and easy accessibility to this unbanked population. Armed with suitable technology, the
business correspondents help in taking the banks to the doorsteps of rural households.
C. EBT Electronic Benefits Transfer To plug the leakages that are present in transfer of
payments through the various levels of bureaucracy, government has begun the procedure
of transferring payment directly to accounts of the beneficiaries. This human-less transfer
of payment is expected to provide better benefits and relief to the beneficiaries while
reducing governments cost of transfer and monitoring. Once the benefits starts to accrue to
the masses, those who remain unbanked shall start looking to enter the formal financial
sector.
Financial Inclusion in India Challenges:

Some of the policy changes to improve financial inclusion were hurriedly executed without
setting up appropriate regulatory oversight or consumer education. Aggressive micro credit
policies that were introduced to enhance financial inclusion resulted in consumers becoming
quickly over-indebted to the point of committing suicide. There were large scale suicide
cases reported. We also witnessed repayment rates for Micro-lending organizations collapse
after politicians in one of the countrys largest states called on borrowers to stop paying back
their loans, threatening the existence of the entire 4 billion a year Indian micro credit
industry. Industry is still trying to recover from that setback.
It was also felt after a decade of efforts in this space that financial inclusion isnt possible
without financial education. We have seen even in mature & literate economies like the US,
there are several social issues that arise from easy availability of credit. At the hind side this
should have been anticipated but wasnt. RBI launched National Strategy for Financial
Education on July 16, 2012 with a vision to build A financially aware and empowered India
with the following goals:
Create awareness and educate consumers on access to financial services,

availability of various types of products and their features.
Change attitudes to translate knowledge into behavior.
Make consumers understand their rights and responsibilities as clients of financial
services.
Opportunities:
Developing Next generation payment systems Financial inclusivity deals
with high volume but small ticket transactions. Existing payment gateways are
too expensive and not built grounds-up to deal with the complexity & nature of
this business. Therefore there is an acute need for a new payment gateway
that is low cost and based on either Aadhaar or biometrics.
Mobile technology could be leveraged in various ways as there are over 700
Million people in India who have mobile phones. Today mobiles can do almost
everything, from biometrics to even IRIS & document scanning. There are
limitless applications one can think of.
Financial Applications Various financial applications be it in insurance, in
capital markets or banking could be developed to be able to reach out to the
rural masses. All these applications must be able to support Aadhaar,
Biometrics & be able to work thru Business Correspondents.
Services Setting up efficient Business Correspondents & training them to be
able to conduct multiple businesses is another massive area of opportunity.
NDA Government (Financial Inclusion brings poor close to the development)

What Modi government has done is to address the systemic issues. Most importantly, it has
successfully addressed the most important issue of financial exclusion, which had kept 80 %
of the Indian population untouched by Indias economic success so far.
To address this issue, Modi government launched an ambitious programme of Jan Dhan
Yojana. More than 10 million bank accounts were opened over a period of eight-nine
months. This has brought majority of Indian population within the financial structure of the
economy.
Till now, the biggest stumbling block which we faced in terms of correcting the skewed
distribution of our national income was exclusion of the majority of Indian population from the
financial structure of the country. The result was that even schemes launched with the most
laudable objectives and intentions failed to reach those at the grassroots level.
However, Modi government has addressed this issue once and for all. The implications of
this step are yet to sink in. This scheme is a catalyst that would convert Indias growth story
into Indias development story. Now subsidies can reach the beneficiaries directly,
compensation can be transferred directly to the bank accounts and the chances of leakages
have got minimised.
I am not saying that Jan Dhan Yojna Scheme is a panacea for all the problems but the fact
remains that it has brought in at least 10-15 million households into the economic
mainstream of the country.
In fact, the Jan Dhan Yojana was only the beginning of addressing the most
marginalised sections of the society, which have been excluded from Indias success story
so far. Thus, in first stage, these sections were included into the mainstream and in the
second stage, they have been provided a strong social security cover through launch of
three schemes Pradhan Mantri Jeevan Jyoti Bima Yojana; Pradhan Mantri Suraksha Bima
Yojana and Atal Pension Yojana.
The first scheme is offering Rs two lakh cover at a premium of Rs 330 every year. Bank
account holders in the age 18 to 50 years are eligible to take this facility. The life risk cover
will get terminated after 55 years.
Pradhan Mantri Suraksha Bima Yojana offers a renewable one year accidental death cum
disability cover of Rs two lakh at a premium of Rs 12 every year. The insured will get Rs one
lakh in case of partial permanent disability. The Atal Pension Yojana is for the unorganised
sector.
In India, 80 % of the population has been without any social security cover. These three
schemes are precisely focused at addressing these concerns. The Jan Dhan Yojana has laid
a strong background for this step.
In a short period, if a government has been able to address key gaps, which had excluded
80 % of the population of the country from the India story so far, it does indicate surely that
we are moving in the right direction, with right speed, at last!

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Even after 70 years of independence, a large section of Indian population still remains

What is Financial Inclusion?

Why Financial Inclusion in India is Important?

vulnerably dependent of informal channels of credit like family, friends and

Why is financial inclusion needed in India? - (A Graphical

Steps taken by RBI to support Financial Inclusion:

Financial Inclusion in India Challenges:

Create awareness and educate consumers on access to financial services,

NDA Government (Financial Inclusion brings poor close to the development)

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