Financial Inclusion in India Introduction

• Reserve Bank of India (RBI) Governor Sanjay Malhotra recently said that cooperation and coordination between banks and consumers was essential for achieving optimum financial inclusion. 
• He also said that banks are strengthening their customer base and financial inclusion camps are being organised across India to disseminate information with emphasis on completing mandatory responsibilities like re-Know your customer (KYC).

About Financial Inclusion:

• Financial inclusion refers to the provision of financial services at affordable costs to every section of society, including disadvantaged and low-income groups.
• The term ‘financial’ covers all forms of financial services such as savings, payments, and credit provided by formal financial institutions.
• Its objective is to overcome the barriers that prevent people from participating in the formal financial sector.

United Nations Definition of Financial Inclusion:

• Access to a complete range of financial services, including savings, deposit facilities, payment and transfer mechanisms, credit, and insurance, at a reasonable cost for all households.
• Availability of sound and secure institutions that function under clear regulations and established industry performance standards.
• Ensuring financial and institutional sustainability to maintain continuity and reliability of investments.
• Promotion of competition among providers to guarantee clients greater choice and affordability.

What is the Need for Financial Inclusion in India?

• Banking Access for the Unbanked: 

• • Universal Account Access: Financial inclusion ensures that every citizen has access to a bank account, which serves as a gateway to a wide range of financial services.
  • Gateway to Formal Finance: These accounts enable participation in savings, credit, insurance, and digital transactions, bridging the gap between the unbanked population and the formal economy.
• Poverty Alleviation and Social Equity: 
  • Asset Creation and Risk Management: Providing savings, loans, and insurance services to the poor helps them accumulate assets, manage financial risks, and escape the cycle of poverty.
  • Empowering Vulnerable Groups: Migrants, farmers, daily wage workers, and self-employed individuals gain the tools to participate meaningfully in economic activities.
  • Women’s Empowerment: Access to finance fosters gender equality by promoting economic independence, improving household welfare, and supporting entrepreneurship.
• Insurance and Social Security Coverage: 
  • Universal Insurance Access: Financial inclusion enables coverage for life, health, accident, and other insurance products for all citizens.
  • Pensions and Retirement Planning: Extends the availability of pension schemes and retirement planning services, securing long-term financial stability for vulnerable populations.
• Asset Diversification and Investment Opportunities: 
  • Broader Financial Portfolios: Inclusion allows households to diversify their assets by participating in capital markets, mutual funds, and other investment avenues.
  • Sustainable Wealth Building: Encourages disciplined savings and investment, which strengthens economic resilience for low-income households.
• Improved Access to Credit: 
  • Bridging the Credit Gap: India lags in credit access compared to other nations. In 2016, India had 154 loan accounts per 1,000 adults, while Bangladesh had 88, Pakistan 26, South Africa 417, and Kenya 231.
  • Affordable Financing: Financial inclusion ensures that small and marginal farmers, micro-entrepreneurs, and low-income households can obtain loans at reasonable rates, boosting economic participation and productivity.
• Driving Economic Growth: 
  • Mobilising Savings: Bringing more citizens into the formal banking system increases household savings and fuels investment.
  • Boosting Productivity: Access to financial services facilitates entrepreneurial activities, business expansion, and income-generating projects, contributing to GDP growth.
• Formalisation of the Economy: 
  • Reducing Informality: Promotes transition from cash-based informal sectors to the formal economy.
  • Transparency and Accountability: Improved record-keeping, tax compliance, and regulatory oversight strengthen economic governance.
• Efficient Delivery of Welfare Benefits: 
  • Direct Benefit Transfers (DBT): Financial inclusion supports targeted welfare programs by ensuring that subsidies, pensions, and insurance benefits reach the intended beneficiaries.
  • Integration with JAM Trinity: Linking Jan Dhan accounts, Aadhaar, and mobile numbers reduces leakages, increases administrative efficiency, and enables real-time tracking of benefits.
  • Affordable Coverage: Facilitates accessible insurance and pension schemes for informal sector workers, protecting the most vulnerable populations.

What are the Challenges to Financial Inclusion in India? 

• Low Financial Literacy: 

• • • Limited Awareness: A large segment of the population, including rural households, low-income groups, and small informal businesses, rely on informal credit sources due to a lack of understanding of banking products.
    • Impact on Participation: Poor financial literacy discourages individuals from opening bank accounts, availing loans, or participating in digital payment systems, perpetuating economic exclusion.

• High Transaction Costs: 

• • • Operational Challenges: Traditional brick-and-mortar banking in remote areas incurs high operational expenses, which discourages banks from expanding services to under-served regions.
    • Barrier to Accessibility: Elevated costs of banking operations often translate into limited branch availability, fewer ATMs, and higher charges for transactions, restricting financial inclusion.

• Insufficient Credit Information: 

• • • Lack of Credit History: Low-income households and informal businesses often have inadequate documentation, making it difficult for banks to assess creditworthiness.
    • High Cost of Lending: The absence of reliable data increases the risk for lenders, leading to higher interest rates or denial of credit for the unbanked and under-served populations.

• Low and Irregular Income: 

• • • Income Constraints: Rural populations frequently earn low and irregular incomes, often through seasonal employment, limiting their ability to save or invest.
    • Impact on Banking Usage: Irregular cash flows reduce the feasibility of participating in formal financial services, further marginalizing these communities.

• Regulatory Overlap (“Regulatory Cholesterol”): 

• • • Multiple Authorities: Agencies like RBI, NABARD, and SIDBI simultaneously govern different aspects of financial inclusion, creating overlapping regulations.
    • Coordination Issues: Multiplicity of rules and fragmented governance slows down implementation and creates inefficiencies in extending financial services to the target population.

• Rising Non-Performing Assets (NPAs): 

• • • Weak Bank Balance Sheets: Increasing NPAs have made banks more cautious in lending to farmers, small businesses, and thin-file clients (those with limited or no credit history).
    • Hesitation in Lending: The risk-averse approach of banks limits credit flow to the most vulnerable sections, impeding inclusive financial growth.

• Technological Limitations: 

• • • Infrastructure Gaps: Frequent machine breakdowns, poor internet connectivity, and malfunctions in handheld banking devices hinder the reach of financial services.
    • Digital Inclusion Barrier: Technological challenges prevent unserved and under-served populations from participating fully in the digital banking ecosystem.

• High Cost of Banking for Customers: 

• • Profit-Driven Charges: In a competitive environment, banks levy fees for maintaining minimum balances, ATM usage, transaction processing, and other services.
  • Financial Exclusion: High service charges discourage low-income individuals from accessing banking facilities, limiting their participation in formal finance.

Government Initiatives for Financial Inclusion in India

• Pradhan Mantri Jan Dhan Yojana (PMJDY):

• • Overview: Launched in 2014 as a national mission, PMJDY provides zero-balance bank accounts, along with access to affordable credit, insurance, remittance, and pension facilities. 
  • Benefits: 

• One basic saving bank account
• No minimum balance requirement,
• Rupay debit card
• Accident insurance cover of 1 Lakh
• Overdraft facility of ₹10,000 to eligible account holders

• Impact: The success of scheme resulted in over 55.98 crore beneficiaries (as on 4 August 2025) where over 55 per cent accounts are held by women. 

• Pradhan Mantri Mudra Yojana (PMMY):

• • Overview: The scheme facilitates loan up to ₹20 lakhs to income generating small and micro enterprises engaged in the manufacturing, trading or service sectors including activities allied to agriculture such as poultry, dairy, beekeeping. 
  • Loan Categories:

• Shishu: Up to ₹50,000
• Kishor: ₹50,001 – ₹5 lakh
• Tarun: ₹5 lakh – ₹10 lakh

• Impact: Facilitates job creation, small business growth, and financial empowerment of low-income entrepreneurs.

• Stand Up India Scheme: 

• • • Purpose: Promotes self-employment by providing bank loans ranging from ₹10 lakh to ₹1 crore to SC/ST and women entrepreneurs.
    • Impact: Encourages greenfield enterprise development and financial participation among socially disadvantaged groups.

• Atal Pension Yojana (APY): 

• • • Objective: Provides pension coverage for the unorganized sector, ensuring financial security in old age.
    • Benefits: Subscribers receive a guaranteed monthly pension after the age of 60, promoting retirement preparedness and social security.

• Insurance Schemes for Low-Income Groups: 

• • • Pradhan Mantri Suraksha Bima Yojana (PMSBY): Offers accident insurance at minimal annual premiums.
    • Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): Provides life insurance coverage for low-income citizens.
    • Impact: Millions of low-income individuals gain access to affordable insurance, reducing financial vulnerability.

• Digital Payment Initiatives: 

• • • Key Platforms: Unified Payments Interface (UPI), Aadhaar-enabled payments, Bharat Interface for Money (BHIM), and Digital Banking Units (DBUs).
    • Impact: These initiatives have expanded mobile banking, boosted digital transactions, and empowered citizens to conduct secure and convenient financial operations.

• JAM Trinity (Jan Dhan-Aadhaar-Mobile): 

• • • Concept: Integrates Aadhaar, PMJDY accounts, and mobile connectivity to improve access to government benefits and welfare schemes.
    • Impact: Ensures efficient delivery of subsidies, direct benefit transfers (DBT), and financial services, reducing leakages and promoting transparency.

• Financial Literacy Programs: 

• • • RBI Project Financial Literacy: Educates school and college students, women, rural and urban poor, military personnel, and senior citizens about banking and finance.
    • SEBI “Pocket Money” Program: Aims to teach school students about saving, investing, and financial planning, promoting long-term financial literacy.
    • Impact: Increases awareness about the value of money, prudent financial management, and informed participation in formal financial systems.

• Financial Inclusion Index (FII):

• • Purpose: Developed by RBI, the FII is a composite measure to assess and monitor financial inclusion across India. The Reserve Bank of India released Financial Inclusion Index (FI-Index) for the year ending March 2025 which stands at 67.0 in comparison to 64.2 in March 2024.  Since 2021, FII has increased by 24.3 per cent, which highlights the continuous dedication of government to include every citizen in the growing digital financial infrastructure of the country.

• Parameters:

• Access (35%) – Availability of banking, insurance, investment, and pension services.
• Usage (45%) – Frequency and depth of financial transactions by individuals and households.
• Quality (20%) – Efficiency and reliability of financial services.
• Scale: Ranges from 0 (complete exclusion) to 100 (full inclusion), enabling data-driven policy interventions.

 

Way Forward 

• Diversified Financial Products: 

• • • Objective: Develop a wide range of flexible, accessible, and continuously available financial products tailored to rural needs.
    • Impact: Empowerment through diversified services such as savings accounts, microcredit, insurance, pensions, and digital banking can significantly reduce poverty and improve economic participation in rural areas.

• Streamlined Processes: 

• • • Objective: Re-engineer business processes to enhance outreach to underserved populations.
    • Implementation: Provide doorstep banking services, simplified account opening, and easy access to credit, ensuring a seamless experience for beneficiaries.
    • Impact: Reduces procedural barriers and enhances the adoption of formal financial services.

• Strengthened Partnerships: 

• • • Objective: Enhance collaboration between banks and non-banking entities like Self-Help Groups (SHGs), Microfinance Institutions (MFIs), and NGOs.
    • Impact: Improves availability and accessibility of financial services in remote regions, leveraging local networks to bridge service gaps.

• Safeguards and Consumer Protection: 

• • • Objective: Implement robust protection mechanisms for both service providers and recipients.
    • Measures: Ensure secure digital transactions, clear grievance redressal, fraud prevention, and responsible lending practices.
    • Impact: Builds trust and confidence among marginalized populations, fostering greater participation in formal financial systems.

• Sustainable Profitability:

• • • Objective: Design viable delivery models to ensure that rural financial services remain economically sustainable for providers.
    • Approach: Focus on cost-effective operations, cross-subsidization, and leveraging technology to maintain profitability while serving low-income groups.

• Productivity and Credit-Plus Approach:

• • • Objective: Maximize the developmental impact of financial inclusion initiatives.
    • Credit-Plus Strategy: Integrate timely credit with broader developmental interventions, including community organizing, entrepreneurship training, and leadership development.
    • Impact: Promotes holistic rural development, beyond mere access to finance.

• Capacity Building for People: 

• • Objective: Equip rural branch staff and field officers with the necessary knowledge, skills, and attitude to drive financial inclusion effectively.
  • Measures: Training in digital banking, customer relationship management, financial literacy promotion, and social sensitivity.
  • Impact: Ensures efficient delivery of financial services and sustained engagement with the underserved.