Financial Inclusion is the process of offering banking and financial solutions and services to every individual in the society without any form of discrimination. It ensures access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low-income groups in particular at an affordable cost in a fair and transparent manner by mainstream institutional players. Financial inclusion (FI) is crucial for a wider, inclusive and sustainable growth.
There are many poor households in India that do not have any access to financial services in the country. They are not aware of banks and their functions. Even if they are aware of banks, many of the poor people do not have the access to get services from banks. Financial inclusion wants everybody in the society to be involved and participate in financial management judiciously.
What is Financial Exclusion?
Financial Exclusion is situation in which people do not have access to mainstream financial services such as banking accounts, credit facilities, credit cards and insurance. It covers the group of population who are excluded from the mainstream of formal financial system.
Following are the reasons that also prevent people from participating in the regular and systematic financial setup:
- Low disposable income.
- Locational aspects (lack of permanent address etc.)
- Wrong perception of financial products
- Possibility of transparency thereby a kind of suspicion
- Proximity to money lenders
- Complicated procedure and formalities
- Lack of awareness about financial products and services
- Shyness and embarrassment
- Illiteracy(financial) and misunderstanding about financial products
- Lack of timely assistance (delay)
- Superstitious thinking about insurance products
- (High transaction cost)
- Complicated procedure and multiple formalities
- Unfriendly attitude of the service providers
- Use of foreign language other than the ones which the customers are familiar and comfortable with
- Lack of connectivity with the community
Who are financially excluded?
- Rural poor people like margin farmers and landless labor
- Unorganised sector like people who look for work from time to time such as migrant workers, urban poor.
- Women
- Senior Citizens
Financials Inclusion Meaning
Financial Inclusion is defined as the delivery of financial services and products to the sections of disadvantage and low-income segment of society, at an affordable cost in a fair and transparent manner by regulated institutional players.
It focuses on providing reliable financial solutions to the economically underprivileged sections of the society without having any unfair treatment. It intends to provide financial solutions without any signs of inequality.
The Committee on Financial Inclusion, chaired by Dr. C Rangarajan, Ex-Governor of the Reserve Bank of India in its report (2008) defined financial inclusion 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.”
Objectives of Financial Inclusion
- To help people secure financial services and products at economical prices such as deposits, fund transfer services, loans, insurance, payment services, etc.
- To establish proper financial institutions to cater to the needs of the poor people.
- To build and maintain financial sustainability so that the less fortunate people have a certainty of funds which they struggle to have.
- To have numerous institutions that offer affordable financial assistance so that there is sufficient competition so that clients have a lot of options to choose from.
- To increase awareness about the benefits of financial services among the economically underprivileged sections of the society
- To create financial products that are suitable for the less fortunate people of the society
- To improve financial literacy and financial awareness in the nation.
- To bring in digital financial solutions for the economically underprivileged people of the nation
- To bring in mobile banking or financial services in order to reach the poorest people living in extremely remote areas of the country
- To inculcate the habit of saving money, especially amongst the lower income category that has been living under the constant shadow of financial duress, mainly because of absence of savings, which makes them a vulnerable lot.
- To plug gaps and leaks in distribution of government benefits and subsidies through direct benefit transfers to beneficiaries’ bank accounts rather than through subsidizing products and making cash payments
Financial Inclusion Schemes in India
The Government of India has introduced several schemes for the purpose of financial inclusion. These schemes intend to provide social security to the less fortunate sections of the society. Some of the schemes are:
- Pradhan Mantri Jan Dhan Yojana (PMJDY)
- Atal Pension Yojana (APY)
- Pradhan Mantri Vaya Vandana Yojana (PMVVY)
- Stand Up India Scheme
- Pradhan Mantri Mudra Yojana (PMMY)
- Pradhan Mantri Suraksha Bima Yojana (PMSBY)
- Pradhan Mantri Jeevan Jyoti Bima Yojana
- Sukanya Samriddhi Yojana
- Jeevan Suraksha Bandhan Yojana
- Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)
- Venture Capital Fund for Scheduled Castes under the Social Sector Initiatives
- Varishtha Pension Bima Yojana (VPBY)
Financial Inclusion Initiative by RBI
- No frills account: The RBI had introduced “no-frills” accounts in 2005 to provide basic banking facilities to the poor and promote financial inclusion. The accounts could be maintained without or with very low minimum balance.
- BSBDA: Banks are required to convert the existing ‘no-frills’ accounts’ into ‘Basic Savings Bank Deposit Accounts’. The Basic Savings Bank Deposit (BSBD) Account was designed as a savings account which will offer certain minimum facilities, free of charge, to the holders of such accounts. Banks were advised to offer the following basic minimum facilities in the BSBD Account, free of charge, without any requirement of minimum balance:
- It can be opened by any individual irrespective of his age or income
- No need to maintain minimum balance in this account
- Basic banking facilities like ATM cum Debit Card is offered free of charge to account holders
- There is no limit on number of deposits made in a BSBD account
- Account holders are allowed a maximum of four withdrawals free of charge in a month
- BSBD account holder cannot have a regular saving account in the same bank
- Simplified KYC: The KYC procedure also provides for opening accounts for those persons who intend to keep balances not exceeding Rs. 50,000/- in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rs. 1,00,000/- in a year. Banks should open an account for him, subject to any evidence as to the identity and address of the customer to the satisfaction of the bank
- Branch Expansion: In its Branch Authorisation Policy, the Reserve Bank of India’s (RBI) has granted general permission to domestic Scheduled Commercial Banks (other than RRBs) to open branches / mobile branches / Administrative Offices / CPCs (Service Branches), in Tier 3 to Tier 6 centres (with population less than 50,000) without seeking their permission, at least 25 percent of the total number of branches proposed to be opened during a year in unbanked rural (Tier 5 and Tier 6) centres.
- Lead Bank Scheme: The Lead Bank Scheme, introduced in year 1969, envisages assignment of lead roles to individual banks for the districts allotted to them. The lead bank acts as a leader for coordinating the efforts of all credit institutions in the allotted districts to increase the flow of credit to agriculture, MSE and other economic activities with the district being the basic unit in terms of geographical area
- Small Finance Banks (SFBs) and Payments Banks (PBs): Small finance banks and Payments banks play a pivotal role in promoting financial inclusion by extending banking services to the unbanked and underbanked segments of society.
Financial Inclusion Through BC BF Model
In the year 2006, the Reserve Bank of India (RBI) initiated Business Correspondent (BC) and Business Facilitator (BF) models for ensuring greater financial inclusion and stretching its outreach of banking sector. It enable banks to use the services of Non-Governmental Organisations/ Self Help Groups (NGOs/ SHGs), Micro Finance Institutions (MFIs) and other Civil Society Organisations (CSOs) as intermediaries in providing financial and banking services through the use of Business Facilitator and Correspondent models. Banks pay commission/ fee to the Business Facilitators/ Correspondents for their services.
Business Facilitator
Under the “Business Facilitator” model, banks may use intermediaries, such as, NGOs/Farmers’ Clubs, cooperatives, community-based organizations, IT enabled rural outlets of corporate entities, Post Offices, insurance agents, well-functioning Panchayats, Village Knowledge Centres, Agri Clinics/ Agri Business Centres, Krishi Vigyan Kendras and KVIC/ KVIB units, depending on the comfort level of the bank, for providing facilitation services.
The services may include:
- Identification of borrowers and fitment of activities;
- Collection and preliminary processing of loan applications including verification of primary information/data;
- Creating awareness about savings and other products and education and advice on managing money and debt counselling;
- Processing and submission of applications to banks;
- Promotion and nurturing self help groups/ joint liability groups;
- Post-sanction monitoring;
- Monitoring and handholding of self help groups/ joint liability groups/ credit groups/ others;
- Follow-up for recovery
Business Correspondent (BC)
Under the “Business Correspondent” model, NGOs/ MFIs were set up under Societies/ Trust Acts, societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States, section 25 companies, registered NBFCs not accepting public deposits, Post Offices, retired bank employees, ex-servicemen and retired government employees may act as Business Correspondents.
In addition to activities listed under the Business Facilitator Model, the scope of activities to be undertaken by the Business Correspondents will include
- Disbursal of small value credit,
- Recovery of principal / collection of interest
- Collection of small value deposits
- Sale of micro insurance/ mutual fund products/ pension products/ other third party products and
- Receipt and delivery of small value remittances/ other payment instruments.
Financial Inclusion Index
The Reserve Bank of India has constructed a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country. The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion. The FI-Index comprises of three broad parameters (weights indicated in brackets) viz., Access (35%), Usage (45%), and Quality (20%) with each of these consisting of various dimensions, which are computed based on a number of indicators.
The annual FI-Index for various periods are follows:
- March 2017 – 43.40
- March 2021 – 53.9
- March 2022 – 56.40
- March 2023 – 60.10
Improvement in FI Index was mainly contributed by Usage and Quality dimensions, reflecting deepening of financial inclusion.
G20 Financial Inclusion
The Group of Twenty (G20) recognizes that financial inclusion is a key enabler in the fight against poverty. The Global Partnership for Financial Inclusion (GPFI) is an inclusive platform for all G20 countries, interested non-G20 countries and relevant stakeholders to carry forward work on financial inclusion.
Financial Inclusion and Digital Payment System
- Unified Payments Interface
- DigiLocker
- Unstructured Supplementary Service Data
- Immediate Payment Service (IMPS)
- National Electronic Funds Transfer (NEFT)
- Aadhaar Pay
- Debit cards
- BHIM
- Credit cards
National Strategy for Financial Inclusion 2019-2024
The National Strategy for Financial Inclusion for India 2019-2024 has been prepared by RBI under the aegis of the Financial Inclusion Advisory Committee.
The National Strategy for Financial Inclusion 2019-2024 sets forth the vision and key objectives of the financial inclusion policies in India to help expand and sustain the financial inclusion process at the national level through a broad convergence of action involving all the stakeholders in the financial sector. The strategy aims to provide access to formal financial services in an affordable manner, broadening & deepening financial inclusion and promoting financial literacy & consumer protection.
RBI identified six strategic objectives of a national strategy for financial inclusion:
- Universal access to financial services
- Providing basic bouquet of financial services
- Access to livelihood and skill development
- Financial literacy and education
- Customer protection and grievance redressal
- Effective coordination
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