Building on inclusion

The NDA government and Reserve Bank of India have thrown their collective resolve behind efforts to make India’s financial system more inclusive in recent years. After plugging away at ineffective alternatives, the government hit upon the winning idea of Pradhan Mantri Jan Dhan Yojana in 2014 which resulted in the opening of 43 crore new bank accounts in seven years, winning India accolades from World Bank. This makes it somewhat surprising that RBI’s newly launched Finance Inclusion Index should assign India a maiden score of just 53.9 out of 100, after assessing 97 indicators on access, usage and quality of financial services. While RBI hasn’t provided any details on how it arrived at this score, data from its annual reports offer some insight into why the task of financial inclusion has been well-begun, but perhaps remains half-done.

There’s little doubt that Bharat’s access to financial services has grown by leaps and bounds. Between March 2016 and December 2020, banking outlets in villages vaulted from 5.86 lakh to 12.95 lakh, with rising ranks of banking correspondents (BCs) making up for stagnating physical bank branches. BCs also appear to have been the driving force behind basic bank accounts growing from 46.9 crore to 64.9 crore (which includes Jan Dhan accounts) in the same period. Contrary to misgivings, these accounts have not remained dormant, with their deposits more than trebling from ₹63,800 crore to ₹2.03 lakh crore in five years. These accounts have helped reach benefits from a variety of government schemes from LPG subsidies to Covid relief, directly to women of the household. Helped by BCs, basic account holders have also taken to tech-enabled transactions in a big way, their value soaring from ₹1.68 lakh crore to ₹8.28 lakh crore in five years. These achievements make a case for policymakers to smooth out irritants such as TDS and GST that impede ease of transacting for BCs.

Three other concerns also need addressing. One, frequent usage of digital services doesn’t translate into intimate knowledge of how their back-end systems work. Their quick adoption has therefore left a vast majority of new users vulnerable to financial cyber-crime, requiring policymakers to explore new mediums and local languages to educate them on safe use. Two, banks continue to drag their feet on offering credit to holders of basic bank accounts despite the growing balances. By end-2020, only 59 lakh of the 65 crore basic account holders had used the overdraft facility and had drawn a mere ₹500 crore. As lack of credit history acts as the biggest barrier to excluded folks accessing mainstream financial products, banks need to be pushed to offer credit in small doses, so that they can build up a credit record. Finally, it has been public sector banks who have done much of the heavy lifting on financial inclusion so far. It is about time private sector players tailored investment, loan and insurance products for the bottom of the pyramid, instead of scrambling to woo the over-banked creamy layer.