One of the greatest achievements of the government in the last decade has been the remarkable strides in financial inclusion, primarily through the implementation of the Pradhan Mantri Jan Dhan Yojana (PMJDY). PMJDY, along with Aadhaar and mobile technology (the JAM Trinity), had accelerated the financial inclusion rate from 25 per cent in 2008 to over 80 per cent among adults, in just six years.

This success is further evidenced by the near-universal coverage of banking services across villages, with 99.7 per cent of them having access to banking outlets as of July 2023. The initiative has also seen a significant increase in digital transactions, showcasing the rising adoption of digital finance in the country. Additionally, the scheme has been particularly impactful for women and rural populations, with around 56 per cent of Jan-Dhan account-holders being female, and about 67 per cent of the accounts opened in rural and semi-urban areas. The PMJDY has brought in more than 50 crore beneficiaries into the formal banking system and accumulating total deposit balances of around ₹2,03,505 crore.

The surge in financial inclusion is partly due to the Direct Benefit Transfer system, which provided sufficient incentive for a large section of the population benefiting from various government schemes to open bank accounts. This was necessary in order for them to receive subsidies and other benefits directly credited to their accounts.

Apart from this, there have been efforts to include all strata in getting access to financing from formal channels through provision of priority sector lending, MUDRA Yojana for MSMEs by providing collateral-free loans, interest subvention scheme for women self-help groups under the Deendayal Antyodaya Yojana - National Rural Livelihood Mission, etc.

This has been further supplemented by the Pradhan Mantri Street Vendor’s AtmaNirbhar Nidhi (PM SVANidhi), which has furthered financial inclusion by ensuring availability of credit to the most vulnerable population in the times of crisis.

The relationship between PM SVANidhi and Jan Dhan Yojana and their collective impact on financial inclusion in India represents a significant paradigm shift in the formalisation of credit after the formalisation of banking. A study by Aggarwal et al. (2023) of SBI Research indicates that the majority of PMJDY accounts are primarily used for remittances. PM SVANidhi, on the other hand, has bridged the gap for those previously without access to formal loans. The analysis, covering transactions from FY21 to FY24, showed that PM SVANidhi loans boosted the consumption spending of beneficiaries by an average of ₹1,385 compared to those without the loans.

Digital acceptability

Moreover, the study highlighted a behavioural shift towards the digital acceptability of transactions among Jan Dhan beneficiaries with PM SVANidhi loans. A notable percentage of accounts shifted to a higher bracket of digital transactions, indicating an increased acceptability and adoption of digital financial services. This synergy between PM SVANidhi and Jan Dhan Yojana not only provided a foundational platform for banking but also facilitated the formalisation of credit, thereby enhancing financial inclusion and enabling behavioural changes towards digital financial services.

The multi-dimensional Financial Inclusion (FI) index of RBI, based on a complex aggregation of 97 indicators, evaluating aspects such as availability, accessibility, usage, and efficiency of financial services, along with financial literacy and consumer protection, demonstrates the significant progress made in the last few years. The FI-Index for March 2023 registered a score of 60.1, up from 43.4 in March 2017. This improvement signals broad-based advancements across various facets of financial inclusion, particularly in the sub-indices of usage and quality, indicating a deeper and more effective penetration of financial services among the population. The increase in the FI-Index score is a testament to the effectiveness of various policy initiatives and infrastructural developments aimed at making financial services more accessible and user-friendly to all strata of Indian society.

This is not to say that the impact of the financial inclusion has been uniform across the country. The RBI’s recently released Report on Trend and Progress of Banking in India shows that States which had lower level of financial inclusion to begin with such as Assam, Bihar, Chhattisgarh and Jharkhand have shown substantial growth and are converging with States like Maharashtra, Tamil Nadu and Andhra Pradesh which had higher initial financial inclusion. This is because the States with higher financial inclusion to begin with have seen less growth, suggesting they may be experiencing the law of diminishing returns. Further, States like Uttar Pradesh, Madhya Pradesh, Rajasthan, which are positioned towards the middle and lower levels, indicate a need for more efforts to enhance financial inclusion.

The law of diminishing returns implies that as investment in financial inclusion increases, the incremental benefits tend to decrease after a certain point. This is evident in States with higher initial financial inclusion, where additional efforts may yield smaller increases.

Hence, to effectively advance financial inclusion further in India, a comprehensive and multifaceted strategy is essential, addressing the varied needs of its diverse population. Central to this approach is the in-depth understanding of the financial behaviours and necessities of impoverished households, which is pivotal for tailoring financial products and services that cater specifically to their unique circumstances. Beyond mere access to credit, this holistic approach encompasses a range of services like savings, insurance and payment options, all designed to manage the financial lives of marginalised and impoverished communities adeptly.

Most importantly, overcoming geographical and social barriers, such as inaccessibility, illiteracy and other socio-economic constraints, is imperative to achieve this vision.

Aditya is OSD Research, and Aakanksha is Joint Director, Economic Advisory Council to the Prime Minister. Views are personal

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