Introduction
According to the Committee on Financial Sector
Reforms, Financial Inclusion, broadly defined, refers to universal access to a
wide range of financial services at a reasonable cost. These include not only
banking products but also other financial services such as insurance and equity
products. Financial
Inclusion and sustainable development go hand in hand. The 17 SDGs agreed to by
the members of U.N. are made to achieve 169 targets in total. These goals and
targets are intricately linked to financial inclusion.
SDGs and their link with Financial
Inclusion
On 1st January 2016, the 17 Sustainable
Development Goals (SDGs) which focus on - ending all forms of poverty and
inequalities, tackling climate change and ensuring prosperity for all officially
came into force. According to the sustainable development agenda, ending
poverty must go hand-in-hand with strategies that build economic growth and
addresses a range of social needs including education, health, social
protection, and job opportunities, while tackling climate change and
environmental protection.
How
financial inclusion can act as a powerful enabler in achieving SDGs?
The following points buttress the claim that
Financial Inclusion is at the heart of achieving SDGs.
- · The first step towards prosperity for low-income families is the access to the basic financial services. Financial Inclusion aspires to cater this need.
- · A well-penetrated financial inclusion will ignite microeconomic growth and these repels can be felt on a macroeconomic level also. The present scenario of large portions of population outside the ambit of mainstream financial system causes both social and economic costs, which according to World Bank can only be undone by focusing on Financial Inclusion.
- · Financial literacy and access to financial products like savings accounts, short term credit, insurance policies, and long term credit will help managing consumption, building assets, and handling shocks.
- · For farmers, micro-loans and long term loans provide the essential capital to procure seeds, equipments, farming tools and fertilizers. Products like crop-insurance support farmers through droughts and bad harvests.
- · Deepening financial inclusion in households can empower families to save to pay for school fees and other educational expenses, and helps them to resist shocks that keep children out of school.
- · Providing women with financial services, such as microfinance and digital payments can help to empower them.
·
India as a nation also committed to achieve SDGs by 2030. Considering the importance of financial inclusion in achieving SDGs, it is important to analyze the prevailing scenario, identify the gaps and work towards bridging the gap so that we as a nation can make tremendous improvements in achieving sustainable development.
A
detailed analysis of the existing situation in India
As per the latest global financial inclusion report
from World Bank, over the period of time India as a nation has made
remarkable improvements in extending financial services to citizens. The
improvements are represented in Figure 01
 |
| Figure 01 |
Even though the statistics are encouraging, it is
important to see whether these developments can be taken as a representative
sample for all the states and regions across India and study the imbalances if
exist.
Disparities
of financial inclusion
The overall benefits of financial inclusion can be
materialized as a nation only if the level of financial inclusion is distributed
evenly across states and regions. Symmetric distribution of financial services
helps the economy to channelize the resources in the most efficient way thereby
maximizing the returns. It can also
bridge the income inequality gap between rich and poor and also facilitate more
effective interstate and cross border trades.
Empirical evidences however suggest that, in India
financial inclusion is not evenly distributed and some states and regions are
much more financially excluded than the others.
The latest CRISIL Inclusix index which measure
India’s progress on financial inclusion using three tangible and critical
dimensions - credit penetration, deposit penetration and branch penetration
also shows the existence of strong disparities across regions. The results are
represented in Figure 02.
 |
| Figure 02 |
Finding
reasons for this disparity
The factors affecting access to financial services can
be viewed from two dimensions, demand side and supply side. The barriers
from demand side include illiteracy, lack of awareness, low income and social
exclusion. Barriers from supply side include geographical barriers, distance
from bank branch, high transaction costs, unsuitable banking products and
complex requirements of documents for opening bank accounts.
Therefore it is important to analyze these two
dimensions and see in which areas we are lacking as a nation.
Demand
side analysis
Two major factors have taken into consideration to
assess whether the root cause of the disparity is because of the lack of focus
on demand side. The first factor considered was the literacy level of
people. Literacy level of people is an important demand side factor because the
degree of literacy levels can further lead to awareness about various financial
services, financial literacy, and can fetch decent jobs thereby increasing the
likelihood of better income over the period. The second factor considered was
the age factor of people. This is because the percentage of economically
active population determines the future demand for financial services.
Literacy
level
To study whether lack of literacy level of people
acting as a barrier towards achieving financial inclusion, the average CRISIL Inclusix
score across regions have been compared with the literacy rates. Statistical
test of Karl Pearson coefficient of correlation has been applied on
these data and the result showed a moderate positive relationship of 0.56
which means that at least 50 percent of the disparity can be attributed to
structural deficiencies. But at the same time some regions such as north
eastern region, central and eastern region of India has achieved dismal
financial inclusiveness which is far below than the all India average despite possessing
an above average literacy rate. The situation of North Eastern states is more
alarming. Even though the average literacy rate in the north eastern region is
79.27, the CRISIL Inclusix score is a mere 37.63 which is much below the
nation’s overall score of 50.1.
 |
| Table 01 |
Age
Factor
Financial service providers usually focus on
economically active population and design appropriate products for them. If
that is the case, as per the latest census data of 2011 India has 70 crores
people in the 15 to 55 age group which is 58 percent of total population. It
indicates a robust demand and a huge market for financial services.
The following observations can be derived from the
following evidences.
We are having a favorable literacy level and age
factor which indicates that a favorable demand side regime is in place. But
unfortunately neither literacy level nor age factor ensures financial
inclusiveness.
To reap the maximum benefits from this favorable
demand side, the primary focus should be on building a strong supply side and
geographic side dimension.
How much effective is the existing supply side
framework to handle the imbalances?
Supply
side analysis – effectiveness of the existing systems
The government and RBI have introduced numerous
actions over the years to increase the level of financial inclusion by giving
more focus on supply side. Nationalization of banks (1969, 1980), establishment
of Regional Rural Banks (1975, 1976) and self-help group-bank linkage program
(1989, 1990) were some of the significant actions in the past.
One of the significant projects introduced in the
recent past to tackle the supply side issues is Pradhan Mantri Jan-Dhan Yojana
(PMJDY). It is therefore important to evaluate the effectiveness of PMJDY.
Effectiveness
of PMJDY
Objective of "Pradhan Mantri Jan-DhanYojana
(PMJDY)" as per its official website is ensuring access to various
financial services like availability of basic savings bank account, access to
need based credit, remittances facility, insurance and pension to the excluded
sections i.e. weaker sections & low income groups. As per the
latest information, PMJDY project opened 20.87 crores accounts opened with a
total deposit of 32730.72 crores.
To calculate the effectiveness of PMJDY, the number
of new accounts opened in PMJDY schemes in each state is divided with the total
population of that state. Data has been analyzed for all the states. Special emphasis
was provided to the states which scored a score less than 50.1 (India’s overall
financial inclusion score as per CRISIL Inclusix index). The results are shown
in Table 02.
 |
| Table 02 |
National average of India is found to be 17.12
percent (number of accounts opened in India in PMJDY scheme/Total
population*100). The states marked in green performed better than the national
average. But the performance of other states was below national average. From
these statistics it is evident that supply side dimension also has its own limitations.
The conditions of North Eastern states require
special emphasis here. Four out of seven states in the North eastern region of
India did not get enough attention in PMJDY.
Quantifiable
evidences of financial exclusion in north eastern states
To analyze the progress of financial inclusion in
north eastern states over the period, two major factors were considered. Credit
Deposit (C D) ratio and the number of PSBs opened in the region. The
results are represented in Figure 03, 04 and 05.
 |
| Figure 03 |
 |
| Figure 04 |
 |
| Figure 05 |
The statistics show that north eastern region was not
able to make any progress so far but the conditions even worsened over the
years. C D ratio is abysmally low in the region and it is the only region
showed a decrease of C D ratio in 2014 compared to 2011. Similarly the number
of public sector banks opened in the region is also not so encouraging.
From these facts it is apparent that supply side
dimension also has several limitations.
How can we change the scenario?
The
way forward
Focusing on the following factors can help us in
extending the benefits of financial services to the citizens across geographies.
Digital
Financial Inclusion
Connecting people to a digital financial system can generate enormous
welfare benefits for the nation. The concept of digital financial inclusion is
critical considering the unique geographical conditions of our nation. The inordinate delay in transfer of funds from
Government can be bypassed by Digital Financial inclusion. This also leads to
the development of a robust and vibrant trade and ultimately leads to narrowing
of the income-gaps prevalent in the society.
Unleashing
the power of post offices
The branch penetration of post offices in India is
so great that it has presence in almost all the villages that beats the
branch-network of State Bank of India, the biggest PSB. Regulatory support has
to be provided to Post Offices beyond the payment bank license to reap benefits
of this massive network to reach the target of financial inclusion in the
country.
Targeting
our future generations
The
traditional educational system does not provide enough attention in building
financial awareness among students and younger generations. Concepts such as kiddy bank can be implemented in schools
to equip them to gain more practical knowledge. This will create further push
to demand side in future.
India
has tremendous untapped potential as a nation. Aligning financial inclusion
with sustainable development will help us to exit from the vicious cycle of
poverty and unemployment and enable citizens to participate more effectively in
the social and economic process.
The
present government has taken slew of reforms to put financial inclusion at the
forefront. With our recommendations the unintended gaps that have crept into
the system can be bridged. It is therefore important to have a coordinated and
integrated approach between banks and other financial institutions, government,
telecom and technology players, and other enabling agencies to take the
progress of India to higher orbits via an effective process of financial
inclusion.
References
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