The Reserve Bank of India said in a statement in April 2021 that it will be constructing and periodically publishing a Financial Inclusion Index (FII). The index will measure the extent of financial inclusion in the country.
The Department of Financial Services (DFS), Ministry of Finance has been releasing an FII annually aimed at measuring access and usage of a basket of formal financial products and services including savings, remittances, credit, insurance, and pension products. It has three measurement dimensions—access to financial services; usage of financial services; and the quality of the products and the service delivery. Thus, financial inclusion talks about leveraging existing financial players like banks, microfinance institutions, insurers, government pension programmes, and connecting them to each other and to non-financial players, such as mobile network operators, retail outlets with large operating footprints to scale up outreach bigger and faster than specialised providers could do by themselves.
Significance of the Index
Financial inclusion is being recognised all over the world as a key driver of economic growth and poverty alleviation. Access to formal finance can boost job creation, reduce vulnerability to economic shocks, and increase investments in human capital. At a macro level, greater financial inclusion can support sustainable and inclusive socio-economic growth for all. So, the Reserve Bank of India (RBI) came up with a national strategy for financial inclusion 2019–24, based on the inputs and suggestions from Government of India, other financial sector regulators, viz., Securities Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority of India (PFRDA). Various outcomes from wide-ranging consultation held with a range of stakeholders and market players like National Bank for Agriculture and Rural Development (NABARD), National Payments Corporation of India (NPCI), Commercial Banks, and Corporate Business Correspondents, etc., have also been reflected in the strategy.
In this regard, the Financial Inclusion Advisory Committee of the RBI has recommended universal access to financial services wherein every village should have access to a formal financial services provider within a 5-km radius and that digital financial services have to be strengthened in all tier-II to tier-VI centres to facilitate a less-cash society by March 2022.
The plan aims to —
- provide basic financial services to every eligible adult by enrolling every adult under the Pradhan Mantri Jan Dhan Yojana (PMJDY), an insurance scheme, and pension scheme by March 2022. Similarly, the public credit registry has to be made fully operational by March 2022 so that authorised financial entities can leverage the same for assessing credit proposals.
- include new entrants to the financial system—eligible and willing to undergo any livelihood/skill development programme—who may be given the relevant information regarding government livelihood programmes to help them augment their skills.
- make customers aware of the recourses available for grievance resolution with adequate safeguards to store and share customers’ biometric and demographic data to protect their right to privacy.
Why Financial Inclusion
Some of the factors that led to the adoption of financial inclusion are as follows:
- Lack of surplus income;
- Lack of requisite documents;
- Lack of awareness about the product;
- Lack of trust in the system;
- High transaction cost;
- Remoteness of service provider;
- Poor quality of services rendered.
Financial Inclusion and United Nations Sustainable Development Goals
Seven of the seventeen United Nations Sustainable Development Goals (SDG) of 2030 view financial inclusion as a key enabler for achieving sustainable development worldwide by improving the quality of lives of poor and marginalised sections of the society. The goals are—1. Eliminating extreme poverty; 2. Reducing hunger and promoting food security; 3. Achieving good health and well-being, promoting gender equality; 4. Promoting sustained, inclusive and sustainable economic growth; 4. Full and productive employment and decent work; 6. Building resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation; and 7. reduce income inequality within and among countries.
Regulatory Framework
To protect the interest of the customers, promote fair business processes, and prevent unhealthy practices by the market players, there is regulatory and legal framework. RBI adopted a bank-led model to deepen financial inclusion.
Therefore, the following initiatives were taken:
- Banks were mandated to open branches nationwide especially in underbanked pockets which led to a considerable increase in bank branches and later automated teller machines (ATMs) in the 1990s to early 2000. The banks were advised to open brick and mortar branches in villages with a population of more than 5000people, and to prepare Financial Inclusion Plans for a period of three years comprising key parameters, such as modes of delivery of financial services, access to Basic Savings Bank Deposit Accounts (BSBDAs), and transactions through the business correspondent (BC) channel.
- RBI relaxed the branch authorisation guidelines in 2017 to strengthen financial inclusion. Fixed-point Business Correspondent outlets, serving for more than four hours a day and five days a week, were treated on par with physical brick and mortar branches.
- Financial Inclusion Fund (FIF) was created with an initial corpus of 2000 crore to support adoption of technology and capacity building.
- In 2015, RBI issued differentiated banking licence like Small Finance Banks (SFBs) to further financial inclusion by provision of a savings vehicle and supply of credit to small business units, small and marginal farmers, micro and small industries, and other unorganised sector entities through high technologylow-cost operations. Payments Banks provided small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses, and other unorganised sector entities/other users.
- In insurance sector, initiatives included increasing awareness among citizens on the benefits and appropriateness of insurance and enabling greater availability of insurance products (including micro-insurance) by increasing the number of delivery channels, including corporate agents and Common Service Centres.
- On the technology front, web aggregators and insurance repositories were set up to facilitate access and storage of insurance policy details and to enable issuance of insurance policies in an electronic form. Not only that, the institution of Insurance Ombudsman was also created for the protection of interests of policy holders.
- With regard to pension, the PFRDA was set up under the Pension Fund Regulatory and Development Authority Act, 2013 to regulate the National Pension Scheme (NPS). Some of the other key initiatives undertaken in the pension sector include expansion of NPS through increasing the channels of distribution, developing capacity of the officials of its intermediaries, and increasing awareness on old age income security and retirement planning, etc.
Challenges
There are certain critical gaps existing in the usage of financial services and require attention of policy makersthrough necessary co-ordination and effective monitoring. Some of the challenges are as follows:
- Inadequate infrastructure;
- Poor connectivity;
- Convenience and relevance;
- Socio-cultural barriers;
- Product usage;
- Payment infrastructure, etc.
Measurement of Progress
Financial Inclusion Advisory Committee (FIAC) undertakes review of the policies on financial inclusion inter alia its other objectives. RBI collects data from banks on Financial Inclusion Plans, credit flow under priority sector, credit flow to minorities, and progress made under major government schemes. Besides, NABARD collects data from Rural Cooperatives and Regional Rural Banks. Similarly, other financial sector regulators also capture necessary data pertaining to their regulated entities.
Conclusion
To sum up, substantial efforts are needed not only from banks and other financial institutions, but also from an array of other stakeholders including civil society. It is envisaged that ubiquitous physical and digital connectivity coupled with full financial inclusion is possible owing to the focused efforts being undertaken by the respective stakeholders in the time to come. The customer-centric approach for product design and delivery, focus should be laid on financial literacy and strengthening the customer protection framework. While India has largely benefited from the Jan Dhan-Aadhaar-Mobile (JAM) trinity over the last few years, adequate measures are needed to strengthen the digital financial services’ eco-system like increased awareness on usage of digital modes of transactions, increased access points/ acceptance infrastructure, and a safe environment incorporating the principles of consent and privacy. Hopefully, fin-tech may evolve from its present structure, calling for adequate understanding among regulators, financial service providers, and most importantly the customers availing financial services through the digital mode.
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