Financial Inclusion in India

By BYJU'S Exam Prep

Updated on: September 13th, 2023

What is Financial Inclusion

  • Financial inclusion may be defined as the provision of banking/financial services to the vast disadvantaged and low-income sections of the society at an affordable cost.
  • In other words, it is a process of universal access to a wide range of financial services to all parts of society with a timely and adequate credit facility.
  • For the development of the entire population, it is essential that banking and payment services are provided to each section of society without any discrimination.
  • The examples of financial inclusion are the provision of financial services, like – bank accounts, low-cost credit for personal, productive, and other purposes, insurance facilities, financial advisory services etc.

Important Facts

  • World Bank’s Global Financial Inclusion Survey has stated that only 35% of adults in India had access to a formal bank account, and in this only, 8% borrowed money from institutional and formal sources. 
  • Census of 2011 states that only 58.7% of households have access to banking services in the country
  • According to the ‘Financial Access Survey’ Results of the World Bank, in India, financial exclusion is quite low as compared with other developing countries in the world. 
  • Small and Medium Enterprises (SME) sector provided only around 4 per cent of institutionalized finance, leaving the rest to usurious money lenders. 
  • A vast segment of the agricultural sector does not have access to formal credit, forcing the farmers to borrow from informal moneylenders at high-interest rates. 
  • Recently, Economist Intelligence Unit’s 2019 Global Microscope has prepared a report on Financial Inclusion and has stated that India (ranked at 5th position) is among the top nations with the most favourable environment for financial inclusion.

Need for Financial Inclusion 

  • For increasing the economic growth – It helps in capital formation in the country and thus helps in economic growth. Availability of transparent and sufficient credit from formal banking institutions will help in promoting the entrepreneurship in the country. 
  • For reducing Poverty – Financial inclusion will provide greater access to financial services and which will have an increase in savings. This may help in decreasing poverty and income inequality in the country.
  • For service delivery – It will help in direct cash transfers to beneficiary bank accounts for any government subsidy rather than physical cash payments. Thus it will help in faster delivery of services to the needy targeted section of the society in the country.
  • It will help in reducing corruption – When every individual will have access to financial services, then the government may provide the benefit of any scheme to marginalized section through Direct Benefit Transfer (DBP) which will help in reducing corruption.  
  • Financial inclusion develops a culture of savings among the large segment of the population. 

Government initiatives for financial inclusion

  • MUDRA Yojana: It was launched in 2015 intending to provide loans up to Rs10 lakh to non-farm, non-corporate small and micro-enterprises. The three types of loans under MUDRA Yojna are Shishu, Kishore and Tarun.
  • Stand up India Scheme: Under this scheme, every bank branch has to provide a loan of Rs 10 lakhs to Rs 1 crore to at least Scheduled Tribe (ST) or 1 Scheduled Caste (SC) and one woman for setting up of a greenfield enterprise. The Greenfield enterprise may be in the manufacturing, trading or the services sector.
  • Rashtriya Mahila Kosh (RMM): It is an autonomous microfinance organization that works under the Ministry of Women and Child Development. Its main objective is to help poor women in their socio-economic development by providing microcredit at concessional rates.
  • Venture Capital Fund Scheme: Its main objective is to promote entrepreneurship habit among the Scheduled Caste community by providing concessional finance.
  • Prime Minister Jan Dhan Yojana (PMJDY): It is one of the biggest financial inclusion scheme launched in India so far. Its main objective is to provide banking and financial services to the weaker sections of the society.
  • PM Jivan Jyoti Yojana and Pradhan Mantri Suraksha Bima Yojana were launched to increase insurance penetration in the country.
  • Innovative products like Kisan credit cards, overdraft facility and extensive technology was used for the same.  
  • Many Small bank and Payment banks were approved for more penetration of financial services. Recently Indian postal payment bank is also opened to leverage postal department.
  • Increase financial literacy among masses was ensured through various programs. 
  • More branches and ATM have been opened the rural areas.
  • More Regional Rural Banks have been opened at rural areas for more financial inclusion.
  • Priority sector lending to farmers, women and backward section of society have been ensured through various government policies. 

Challenges in financial inclusion 

  • Financial illiteracy: Lack of financial Literacy and poor marketing lead to low awareness among the poor about the benefits of having access to financial services such as low-interest rate.
  • Supply-side constraint: Absence of bank branches and ATM in proximity discourage people from opening a bank account as they have to travel a long distance to access accounts.
  • Lack of collateral: Due to the absence of various collateral, many sections are not able to access the loan services provided by banks.
  • Hidden charges of banks: It discourages the illiterate people in taking any financial services from banks. 
  • Heavy documentation procedure: Most of the illiterate population do not have the understanding of various loan procedures, and hence they prefer informal credit system which provides loan without any hassle.
  • The rising level of Non-Performing Assets (NPA): NPA has distorted the faith in the financial system, and due to high NPA, banks are not able to take up further financial inclusion in far-flung areas.  
  • Lack of innovation in financial products to meet the requirement of various sections such as tenant farmers, women, a disabled and senior citizen is a challenge.
  • Low income, poverty and illiteracy are other main barriers in financial inclusion.

Way Forward

  • Mere opening the account does not ensure the financial inclusion, and hence, there is a requirement of continuous effort by the government so that these financial services are used by the people regularly. 
  • Financial literacy programmes should be undertaken at a mass scale for making aware the masses for financial inclusion. 
  • Financial institutions need to open branches to rural areas also to provide the services to the marginalized section of society too. 
  • Banking Correspondence of the banks needs to be properly incentivized and should be provided facilities so that they can provide the financial services to all sections throughout the year.  

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