What is the equivalent of a heavy-lift ship when it comes to promoting financial inclusion in India? Without a doubt, it is the Indian banking system when it comes to the financial inclusion of the poor and the marginalised in the country.

While over the years the microfinance institution (MFI) channel of promoting financial inclusion, mainly access to credit, has been in the limelight, banks’ role in this inclusive journey has been largely ignored. However, it needs to be clarified that the banking channel is unique in terms of financial inclusion of the poor.

The most basic requirement for financial inclusion is a savings account, which can only be provided by the banks, with a guarantee of up to ₹5 lakh per account per bank. The other channels promoting financial inclusion — the MFIs and Self-Help-Groups — are dependent on banks for infrastructure and links with the payments system.

Financial inclusion initiatives are primarily policy-driven and state-led like the Pradhan Mantri Jan Dhan Yojana (PMJDY) and are implemented through the banking system, dominated by state-owned banks.

Creditable progress

The flagship PMJDY implemented via the banking system has achieved a lot in the past 10 years. With the opening of more than 50 crore basic bank account accounts, the decades-old gaps in terms of gender, income, employment status and education levels, have either been eliminated or narrowed down to negligible levels.

Yet, the challenge of meaningfully integrating the masses in the formal financial system remains. The penetration rate of subsidised insurance and pension products that accompany such basic accounts is still low.

Balances in the PMJDY (basic bank accounts) are savings ‘of the poor’. These savings should be used to make more credit available to credit starved nano/micro enterprises and individuals at the ‘bottom of the pyramid’. These accounts have an aggregated balance of more than ₹2-lakh crore resulting in annual income of more than ₹10,000 crore for the banking system.

The digital initiatives too need an inclusive approach given the ground realities related to social and financial exclusion. Banking based on smartphone ownership doesn’t work at the very low end of the income and wealth pyramid. There is a need to introspect as to why the ecosystem has ignored the Unstructured Supplementary Service Data (USSD) for UPI payments, which is compliant with feature phones.

The massive reduction in the costs of domestic remittances over the years has demonstrated the efficacy of technology for good.

Sending a domestic remittance for even the most underprivileged meant a ‘tax’ of 10 per cent, which has been reduced to 1-2 per cent today.

With some of the progress been undone by Covid related disruptions, if new measures are not implemented to make formal financial services more convenient, accessible and relevant to the needs of the poor, those recently included run the risk of slipping out of the net.

The writer is a former commercial banker and contributor to the Inclusive Finance India Report 2023

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