Financial Inclusion Decoded in India

Financial Inclusion Decoded

EVEN after 60 years of independence, a large section of Indian population still remain 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.


There is a long history of financial inclusion in India. It has traditionally been understood to mean opening new bank branches in rural and unbanked areas. Nowadays, however, financial inclusion is seen to be something more than opening bank branches in unbanked areas to take formal financial services across the length and breadth of the country. In the context of the various shortcomings in delivering subsidies, direct transfers using technology have been thought of. The beneficiary needs to have at least one bank account. Since in a logistics point of view it is impossible to open that many physical branches — the brick and mortar type — the accent will be on opening electronic accounts. Technology adaptation would be a key feature in this scheme for financial inclusion.

The RBI has, in the recent past, taken several steps to further inclusion. Very recently, it circulated for public comment two sets of draft guidelines for issuing licences to payment banks and small banks.

These niche banks with lower entry-level norms than for normal commercial banks are meant to further inclusion. While it will take a while for these banks to come up, it is obvious that the RBI is betting on them to provide banking services to those who remain outside the purview of formal banking.

 What is Financial Inclusion in banking ? 

Financial inclusion is the delivery of financial services at affordable costs to vast sections of disadvantaged and low income groups (for example “no frill accounts”).

Financial inclusion is a broad term used to describe the provision of savings and loan services to the poor in an inexpensive and easy to use form. It includes opening of bank accounts for those that have never had one, and allowing people to send and receive money easily. The main objective is ensuring access to formal credit for people who depend on informal means for their financial needs.

Simplicity and reliability in financial inclusion in India, though not a cure all, can be a way of liberating the poor from dependence on indifferently delivered public services and from venal politicians, in order to draw in the poor, the products should address their needs — a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the money lender, easy to understand life and health insurance and an avenue to engage in savings for the old age.

– Raghuram Rajan

 Why is it important? 

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 channel : 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 move 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 government’s 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.

 Where does India stand? 

According to the Reserve Bank of India, just over 50% of Indian adults held an account with a financial institution, compared to close to 70% of adults in various BRICS economies, and an even higher percentage of adults in the US and UK. Similarly, in 2014, 6% of Indian adults had borrowed from a formal financial institution in the past 12 months compared with 10% or more in other BRICS economies. As of 2014, there were only 18 ATMs per 100,000 adult population in India against over 65 in South Africa and over 180 in Russia. Similarly, 10% of individuals aged 15 years and above had made payments through debit cards in India as against approximately 40% in South Africa.

 The present state of Financial Inclusion in India 

Banks have opened 19.21 crore accounts under the government’s ambitious financial inclusion scheme, Pradhan Mantri Jan Dhan Yojana (PMJDY) with deposits of more than Rs 26,819 crore till November. These zero balance bank accounts have been accompanied by 16.51 crore debit cards, a life insurance cover of Rs 30,000 and an accidental insurance cover of Rs 1 lakh. More than Rs 4,273 crore have been routed through these accounts towards payment of wages under the rural employment programme (MNREGA) and transfer of cooking gas subsidy amounting to Rs 17,446 crore. The government is pushing financial inclusion through the Jan Dhan, Aadhaar and Mobile (JAM)) trinity and use of innovative delivery channels, such as mobile wallets. RBI has also granted an ‘in principle’ approval to 10 small banks and 11 payment banks, which is expected to deepen the inclusion process.

 Steps taken by RBI to support Financial Inclusion 

RBI set up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (2005–06) and urged banks to review their existing practices to align them with the objective of financial inclusion. RBI also exhorted the banks and stressed the need to make available a basic banking ‘no frills’ account either with ‘NIL’ or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population.


Of the many schemes and programmes pushed forward by RBI the following need special mention.

1. Initiation of no-frills account : These accounts provide basic facilities of deposit and withdrawal to account holders 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.

2. 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.

3. 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 government’s 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.

 Major Efforts for Financial Inclusion 

Opening of no-frills accounts : Basic banking no-frills account is with nil or very low minimum balance as well as charges that make such accounts accessible to vast sections of the population. Banks have been advised to provide small overdrafts in such accounts.

Relaxation on know-your-customer (KYC) norms : KYC requirements for opening bank accounts were relaxed for small accounts in August 2005, thereby simplifying procedures by stipulating that introduction by an account holder who has been subjected to the full KYC drill would suffice for opening such accounts.

Engaging business correspondents (BCs) : In January 2006, RBI permitted banks to engage business facilitators (BFs) and BCs as intermediaries for providing financial and banking services. The BC model allows banks to provide doorstep delivery of services, especially cash in-cash out transactions, thus addressing the last-mile problem.

Use of technology : Recognizing that technology has the potential to address the issues of outreach and credit delivery in rural and remote areas in a viable manner,banks have been advised to make effective use of information and communications technology (ICT), to provide doorstep banking services 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.

GCC (General Purpose Credit Card) : With a view to helping the poor and the disadvantaged with access to easy credit, banks have been asked to consider introduction of a general purpose credit card facility up to `25,000 at their rural and semi-urban branches. The objective of the scheme is to provide hassle-free credit to banks’ customers based on the assessment of cash flow without insistence on security, purpose or end use of the credit.

Simplified branch authorization : To address the issue of uneven spread of bank branches, in December 2009, domestic scheduled commercial banks were permitted to freely open branches in tier III to tier VI centres with a population of less than 50,000 under general permission, subject to reporting.

Opening of branches in unbanked rural centres : To further step up the opening of branches in rural areas so as to improve banking penetration and financial inclusion rapidly, the need for the opening of more bricks and mortar branches, besides the use of BCs, was felt.

 C Rangarajan Committee 

In 2006, Government of India constituted a “Committee on Financial Inclusion” which was headed by Dr C Rangarajan, Chairman, Economic Advisory Council to the Prime Minister. The members of this committee were the stalwarts of the Finance & Banking system in the country.

while financial inclusion can be substantially enhanced by improving the supply side or the delivery systems, it is also important to note that many regions, segments of the population and sub-sectors of the economy have a limited or weak demand for financial services.

– C Rangarajan Committee

 Some Facts 

# In the Indian context, the term ‘financial inclusion’ was used for the first time in April 2005 in the Annual Policy Statement presented by Y.Venugopal Reddy,the then Governor, Reserve Bank of India.

# In the Khan Committee Report, the RBI exhorted the banks with a view to achieving greater financial inclusion to make available a basic “no-frills” banking account.

# Financial inclusion again featured later in 2005 when it was used by K.C. Chakraborthy, the chairman of Indian Bank.

# Mangalam (Tamil Nadu) became the first village in India where all households were provided banking facilities.

# Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers’ accounts and service them through a variety of channels by leveraging on IT.


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