What after financial inclusion?

The last fifteen years in India have witnessed dramatic changes in the financial sector in response to the significant exclusion of vulnerable sections from financial services. This conspicuous development exclusion led to the constitution of an expert committee, which submitted an extensive report
in 2008.

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The report highlighted the nature of financial exclusion in the country and proposed a feasible roadmap of suggestions to ensure the financial inclusion of the marginalised. It recommended a strong inclusion process that ensures financial services and timely and adequate credit for vulnerable groups, such as weaker sections and low-income groups, at an affordable cost.

The Census revealed that 41% of households in the country and 46% in rural areas are financially excluded.

The committee also identified regions with the highest incidence of financial exclusion, particularly households engaged in cultivation. The Central region (Chhattisgarh, Madhya Pradesh, Uttar Pradesh, and Uttaranchal), the Eastern region
(Bihar, Jharkhand, Odisha, and West Bengal), and the North Eastern region were considered financially backward. These regions accounted for 64% of the total number of excluded cultivators, which stands at 32.48 million.

To address this issue, the committee suggested completing the mission of financial inclusion by 2015, setting targets for each Scheduled Commercial Bank (SCB) and Regional Rural Bank (RRB). Despite missing the target initially, there were notable changes, such as the introduction of Direct Benefits Transfer (DBT) for subsidies, payments, pensions, remittances, etc., to all target groups. Another significant change was the introduction of the Pradhan Mantri Jan Dhan Yojana’ (PMJDY) in 2013. The PMJDY mandated providing basic bank accounts to excluded individuals, along with ‘RuPay Credit Cards’, while promoting financial literacy. The unspoken objective was to empower new bank account holders to access financial services, including credit, and reduce their reliance on high-cost local money lending sources.

The PMJDY has achieved remarkable success in providing basic bank accounts, especially in financially backward regions. By February 2023, financial institutions had opened 48.12 crore bank accounts, with 32.09 crore in rural areas and 16.03 crore in urban areas. Of these, 32.63 crore account holders (63%) were issued RuPay Credit Cards. An interesting change was the maintenance of bank balances in these accounts, totaling Rs 3,263 crore, indicating that the JDY account holders were not no-balance account holders’. Financially backward regions also shared the success of the inclusion, with 13.80 crore accounts opened, particularly 5.80 crore in the central region, 6.70 crore in the Eastern region, and 1.30 crore in the North Eastern region. Although the average number of accounts opened is in the order of 5732, 7459, and 7849 in the regions, a few states (like Chhattisgarh, West Bengal, and Assam) have performed exceedingly well. Respectively, 7.85 crores, 8.04 crores,
and 1.36 crores of RuPay Credit Cards have also been issued in these regions, totaling 17.25 crores.

PMJDY has been successful in bringing hitherto excluded people into financial institutions. However, it is essential to ensure that new account holders can access financial services, particularly
micro-credit for tiny and small businesses, and disengage themselves from informal financial operations or local
money lenders.

Otherwise, any success of the programme on the supply side is ineffective unless the demand side is effectively met. Because they are first-generation financial citizens, meeting small business needs assumes significance to empower them financially and to achieve household graduation. Apart from this, getting relief from high-cost loans is an overriding priority to save money to meet household exigencies or for posterity.

To achieve this, financial literacy should be a priority objective and promoted extensively, which has been relegated to the background by the banking authorities. Broad canvassing of financial products and services has been missing altogether across the banking sector.

Secondly, the development of tailor-made financial products in thrifts and credit segments suitable for financial deepening is crucial but neglected by banking authorities.

These tailor-made products would not only boost the confidence level of the new financial citizens manifold but also retain them, besides preventing them from falling back to their previous financial situation. The need of the hour, therefore, is to design a wide range of tailor-made financial products considering the socio-economic conditions of new citizens. Equally important is to promote affordable thrift among the new citizens, which is an effective and cheaper source of resource mobilisation.

(The writer is a professor at the Institute of Finance and International Management, Bengaluru)