Money for everyone, everywhere?

Would it be possible for India to move towards financial inclusion. We explore the basics here. Source: The National



An introduction to Financial Inclusion in India where we discuss the basics and study what has slowly become an underrated national priority.


Introduction:- The IMF in a working paper broadly defines Financial Inclusion as an economic state where individuals and firms are not denied access to basic financial services based on motivations other than efficiency criteria. It is an economic condition where banking and other relevant financial services are available to everyone, especially the economically marginalized. The core motivation behind financial inclusion is simply helping all strata in society achieve their full economic potential, improve their standard of living and also actively contribute to the growth and development of an economy.

India, as the world’s second largest developing economy will have to finish considerable work  if it hopes to be financially inclusive in the coming years. As of March, 2013, India ranked second in the world in terms of financially excluded households, after China. This statistic might be incensed by the high population of both these nations, but it still becomes a key concern for policy makers. Without the state enforcing financial inclusion, there is a high probability that formal financial institutions would bypass certain weaker sections of society. That being said, the onus falls upon the policy makers to create an economic and social environment that is conducive for financial inclusion.

More from Mor. Nachiket Mor has been given the mandate to study what should be done to usher in inclusion. His analysis was released recently. Source : LiveMint

Motivation for policy makers:-The prime motivating factor that propels the government(s) to focus on financial inclusivity and economic development through poverty eradication. This would also facilitate the mobilization of savings which would ideally help towards a much needed ‘bottom up’ contribution towards capital formation and the growth of the economy. Credit given to the weaker sections of the society can also inspire entrepreneurship and the creation of small scale businesses. Financial inclusion would also significantly improve the benefits generated by educational, employment, housing and health policies, therefore contributing to both social and economic development. Also several social deterrents in a country like India have unorganised players in the rural financial sector (moneylenders, etc.) and financial inclusion would help in a figurative awakening against the same.

A plethora of banks participating in the Indian market stand to gain.

Motivation for private institutions:-It’s also imperative to analyse the basic motivation banks and financial institutions may have while the policy makers force them to increase their presence in the rural areas. Moving this huge unbanked population into mainstream banking is both an opportunity and a challenge for banks. The obvious advantage would be the huge untapped market available to the banks that hold a ‘first-mover’s advantage’. This would also help with a bank’s credibility, national role and brand recognition. In India, where the populace is largely sentiment based this would be a huge intangible asset . Also, as banks target the cost-conscious unbanked customer, they will be forced to look at ways to offer cost-effective products and services, necessitating technology upgrades and innovations. This would allow them to be both efficient and effective competitors across the nation and not just in the new markets. Banks will also have the chance to usher in a new age of financial literacy in unbanked regions allowing for growth of their market base not just in basic banking but over a period of time, for all their retail products. Creation of effective delivery channels would also help propel productivity and efficiency. For financial inclusion to be a social success and to be economically viable, the interests of all the stakeholders need to be accounted for.

Status Quo: – Financial inclusion has been a key aspect of Indian policy making much before it was formalized. Nationalization of banks, Regional Rural Banks, promotion of Self-Help Groups, infrastructural linkages to specialized banks and micro-finance initiatives are some of the core examples that can be used to substantiate this point.

Despite several efforts, most of which have yielded fairly positive dividends, the outreach of the financial services in India is unreasonably low.  Since 2005-05, the Reserve Bank and the Government of India has worked towards ensuring “each household to have at least one bank account”. This aim is mentioned in the June, 2013 report by the Department of Financial Services (In the Ministry of Finance). As per the same report, inclusion in India has increased exponentially from 35.5% of total households in 2001 to nearly 59% in 2011. Given logical adjustment for population growth and technological progress (especially in telecommunications) in the same time span, this report suggests that the government’s efforts, although not comprehensive, have yielded good results.

This is also attributed indirectly both to public sectors banks and  regional rural banks. The role of private sector banks and foreign banks has been minimal and non-existent respectively. The number of branches of scheduled commercial banks (in March, 2013) shows that out of the 37953 bank branches in rural areas, the distribution between public sector, regional rural banks, private sector banks and foreign banks is 23286(61.35%) , 12722 (35.52%) , 1937(5.2%) and 8(0.02%) respectively. The proportions vary slightly for semi-urban regions (greater private sector participation and considerably lesser regional rural banks).

Has the government really reached out to everyone? Source: Inquisitive

However data collected from the Global Partnership for Financial Inclusion paints a far worse picture. In 2011, only 35.2% of people above the age of 15 held accounts at formal financial institutions. For women, this number dropped as low as 26.5%. Only 8.9 ATMs (Automated Teller Machines) and 10.6 commercial bank branches were available for every 100,000 Indians. However the Census in 2011 tells us that 58.7% of households in India have access to banking services. If one considers the fact that there is an estimated average of 4.8 Indians per household, the number of households sharing one commercial branch is an average of 1965 households.

This indicates us that that while the Government data shows that there is access to banking infrastructure, it doesn’t show the efficiency or the usefulness of the same. There is a strong possibility that high population density in most of inhabited Indian regions contributes to what could be an exaggerated claim of progression towards inclusion.

Over the last few years however, Indian policy has adopted a very pro-active role towards eliminating financial exclusivity. In October 2011, the Government issued a detailed strategy advising banks to open branches in all habitations of 5000 or more in under-banked regions.  The Business Correspondent Model and the Business Facilitators Model has added intermediaries and this allows for greater outreach. The Swabhimaan Campaign has reached out to over 40,000 habitations through alternative strategies (Such as branchless banking) in under-banked areas. Quality assurance is also covered with stricter guidelines being placed on financial practices for regional rural banks . These strategies are complimented by several other policy measures and outreach tactics that the policy makers have initiated since 2005-06.

RBI’s man-in-charge is now the man-in-arms fending for the weakening Indian economy. Source: DNA India

The core essence of the remaining sections of this report ,shall be keeping the contemporary scenario under consideration. In 2013, Raghuram Rajan was appointed as the 23rd Governor of the Reserve Bank of India (RBI) and he made it very evident that financial inclusion was an immediate concern.  In the very first month of his appointment, he established the Report of the Committee on Comprehensive Financial Services for Small Business and Low Income Households(Chaired by Dr. Nachiket Mor)

Core Concerns for India-

 In order to remain comprehensive this report has highlighted five of the most significant concerns that India must tackle in order to make the system more robust . These are given below:-

  1. Financial Literacy: – With the acute need for financial awareness, policy makers and financial institutions need to provide their target benefactors with the relevant knowledge regarding banking, assorted financial services, risks and rewards involved, redressal mechanisms, etc.
  2. Infrastructural Challenges: – An economic environment that proves to be ideal for inclusion strategies would only exist if the government addressed several infrastructural concerns. Better connectivity through roads, rails, regular and uniform availability of power and improved communication (ICTs) would go a long way towards ushering in financial inclusion. Delivery mechanisms need to be made constantly reliable and any obsolete practice or infrastructural setup should be discouraged.
  3. Reliance on Branch Spread: – There is a clear focus on increasing the number of branches all over the nation (with new regulations allocating 25% of all new branches to be opened in Tier 5 and Tier 6 regions). However, alternative research suggests that the spread of branches and financial inclusion are not necessarily directly proportional. This realization is partially visible in Dr.Mor’s Committee’s report. Inclusion needs to compliment India’s telecom growth. It also needs branchless services, greater role of intermediaries, non-banking financial institutions, etc.
  4. Activity, not availability: – India’s data analysis and subsequent planning for inclusion also needs to account for the fact that as banked area has increased, the number of transactions /financial products / credit availability has not increased  in a commensurate manner. This makes inclusion an economically unviable strategy. If this does not change over a period of time, the banks and the entire economy stand to suffer.
  5. Picketty’s recent work needs to be accounted for in order to prevent redundancy in planning decades from now. Source: Bloomberg

    The need for evolution and dynamism: Due to increased global participation in the financial markets in India, there is always a chance that actions elsewhere could threaten the banking industry here. The planning for inclusion needs to be adaptive and evolutionary in case the need arises. The confusion regarding what are being called ‘census towns’ needs to be accounted for. Also, in line of academic breakthroughs like ‘Thomas Piketty’s analysis on the role of capital accumulation and how it influences income inequality, it is fair to suggest that there might be aspects of financial inclusion that would need to be re-evaluated in order to propel growth and development alike. 

Lessons India can take from other developing economies:-

South-South trade, aid and cooperation is quickly becoming a norm and with that in mind, it would only be prudent for India to learn from other developing nations and their experiences with financial inclusion.  While there are several localized and industry specific successes that can be analyzed and potentially replicated in India, this report looks at a few large scale examples of how inclusion in India can be helped by studying the experiences of other nations.

As an example, let us evaluate the Kenyan economy. Kenya’s financial inclusion through branches is less than half of its outreach due to telecommunication spread. There has been a huge ‘mobile revolution’ in rural and semi-urban areas over the last few years and this would be the opportune time to study how Kenya’s success can be replicated uniformly across India or at least in certain regions.

Another aspect that the United Nations Capital Development Fund recommends for the weaker ASEAN nations is that there needs to be a greater degree of automation in services. According to UNCDF, this would provide a greater degree of usage and level of uniformity across the nation. This would also lead to reduction in human error due to dependence on tellers across the banking industry . Also, this invokes familiarity with banking technology and could be used as a ‘gateway’ towards better and more personal banking technology. In India, where traditionally, the human/social aspect has been important and it breeds trust, this small but necessary step could facilitate greater ICT based use of financial services.

Quebec’s Development International Desjardins Group (DID) suggests that greater spread of cooperatives and networks act as an effective tool against exclusion. Burkina Faso was the very first emerging market country they worked in. There are now several cooperatives serving 1.7 million people out of the 2.3 million that have access to financial services. Seventy four percent of Burkina Faso’s population is therefore being served by financial cooperatives, which cross-operate and engage as individual organizations but also as pan-national networks. A more recent example is Lithuania. The network there is much smaller and touches only 120,000 people who are mostly in rural areas. In 2008, during the financial crisis, they were able to continue operating because they were not funded by external capital. These gave them a sense of stability in a crisis and also kept the populace’s belief in the system .

India can also use Bangladesh’s model in a better manner to repair a faltering Microfinance structure with the aid of Japan who has an upper edge in this context. We can also remove/reduce government role in delivery of services (as done successfully by Philippines). Also create partnerships like the south-south linkage between China and Peru in order to share expertise and help in the promotion of inclusion

There are several lessons to be learned internationally . What remains vital however, is the fact that India needs to look into the utility the population derives from the banks and their services and not just the availability of the same.

Anmol Soin

Anmol Soin

Managing Editor at InPRA
Anmol Soin has finished his post-graduate education from the University of Oxford and the University of St.Andrews. Anmol will always credit his academic growth to his time at St.Xavier’s College, Mumbai.

Formerly engaged as a consultant and a researcher for the 14th Finance Commission (Government of India), he has also worked for the Knowledge Partnership Program (IPE Global and UK Government’s Department For International Development).

He was also the Professor for ‘The Economics of International Relations and Geopolitics’ for the final year undergraduates at NMIMS. Having worked at multiple think-tanks, he brings his experiences as a professor and a consultant together to try and frame a comprehensive overview of International Economics for InPRA.
Anmol Soin