The Reserve Bank of India (RBI) released the National Strategy for Financial Inclusion 2019-2024 on January 10, 2020.
It sets forth the vision and objectives of financial inclusion policies in India. The strategy was prepared by the RBI with inputs from the central government and financial sector regulators (Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India and Pension Fund Regulatory and Development Authority of India).
The report refers to financial inclusion as the process of ensuring access to financial services, and timely and adequate credit for vulnerable groups and low-income groups at an affordable cost. Financial inclusion has a multiplier effect in boosting overall economic output, reducing poverty and income inequality, and in promoting gender equality and women empowerment.
Lessons from other countries:
RBI observed that, as of mid-2018, more than 35 countries, including China, Brazil, and Indonesia have a national financial inclusion strategy.
Some common themes across these nations include:
• Following a target-based approach (by targeting specific sectors),
• Strengthening requisite infrastructure of payment mechanisms,
• Strong regulatory framework,
• Focus on last-mile delivery and financial literacy,
• Use of innovation and technology, and
• Periodic monitoring and evaluation of progress made in financial inclusion.
Steps taken for financial inclusion:
The RBI noted that several steps have been taken to further financial inclusion in the country.
• Pradhan Mantri Jan Dhan Yojana (PMJDY), under which 34 crore accounts have been opened with deposits amounting to Rs 89,257 crore (as of January 2019),
• Schemes such as the Pradhan Mantri Suraksha Bima Yojana to provide accidental death or disability cover and Atal Pension Yojana to provide pension cover to subscribing bank account holders.
• Further, it noted that the bank-led model of financial inclusion adopted by the RBI through issuance of differentiated banking licenses (small finance banks and payments banks) and the launch of Indian Post Payments Bank in September 2018 has helped bridge the gap in last mile connectivity.
However, certain critical gaps remain an impediment for financial inclusion, such as:
• Inadequate infrastructure (in parts of rural hinterland, far flung areas in Himalayan and north-eastern region),
• Poor tele and internet connectivity in rural hinterland,
• Socio-cultural barriers, and
• Lack of market players in payment product space.
Strategic objectives for financial inclusion:
RBI identified six strategic objectives of a national strategy for financial inclusion:
• Universal access to financial services,
• Providing basic bouquet of financial services,
• Access to livelihood and skill development,
• Financial literacy and education,
• Customer protection and grievance redressal, and
• Effective coordination.
To achieve this vision, it identified certain milestones such as:
• Providing banking access to every village (or hamlet of 500 households in hilly areas) within a five km radius by March 2020,
• Strengthening digital financial services to create infrastructure to move towards a cash less society by March 2022, and
• Ensuring that every adult has access to a financial service provider through a mobile device by March 2024.
• For providing universal access to financial services, RBI noted that while schemes such as PMJDY have created the required banking infrastructure to enable financial inclusion, efforts are required to improve access to insurance and pension services.
• It recommended that every willing and eligible adult who is enrolled under PMJDY should be enrolled under an insurance or pension scheme by March 2020.
• Similarly, for financial literacy and education, specific modules for target audience (children, entrepreneurs, senior citizens) should be developed through the National Centre for Financial Inclusion and centres for financial literacy should be expanded to reach every block in the country by March 2024.
Measurement of financial inclusion:
RBI recommended that financial inclusion should be measured through parameters across three key indicators.
These include parameters to:
• Measure access, such as number of bank branches or ATMs for a specified population,
• Measure usage, such as percentage of adults with a saving account, insurance or pension policy, and
• Measure quality of services, such as grievance redressal (through number of complaints received and addressed).
• Additionally, it recommended conducting surveys to assess the current impediments to financial inclusion (such as issues faced while using digital services, knowledge of customer rights and attitude of service provider).
What is Financial Inclusion?
• “Financial Inclusion” is the way the Governments strive to take the common man along by bringing them into the formal channel of economy thereby ensuring that even the person standing in the last is not left out from the benefits of the economic growth and is added in the mainstream economy thereby encouraging the poor person to save, safely invest in various financial products and to borrow from the formal channel when (s) he need to borrow.
Need of Financial Inclusion:-
• Lack of financial inclusion is costly to society and the individual. As far as the individual is concerned, lack of financial inclusion forces the unbanked into informal banking sectors where interest rates are higher and the amount of available funds much smaller.
• Because the informal banking structure is outside any legislative framework, any dispute between lenders and borrowers cannot be settled legally.
• As far as the social benefits are concerned, financial inclusion increases the amount of available savings, increases efficiency of financial intermediation, and allows for tapping new business opportunities.
• Scope of the financial inclusion is not limited to only banking services but it extends to other financial services as well like insurance, equity products & pension products etc. Thus, financial inclusion is not just about opening a simple bank account with a branch in an unbanked area.
• Adding the common man into the mainstream economy has other advantages as well as on the one hand it helps inculcate the vulnerable section of the society to save money for its future and the rainy days, take benefits of the economic activities of the country by participating in various financial products like, banking services, insurance & pension products etc., on the other hand, it helps the country to increase the rate of ‘capital formation’ which in turn, give a push to the economic activities in the economy by channelizing the money from every nook & corner of the country.
• In the absence of people of a country financially included in the mainstream, they often tend to park their savings/ invest in the non-productive assets like land, buildings & bullion etc.
• While, financially included people can easily avail the credit facilities, whether they are sitting in the organised or unorganised sector, urban or rural sector. Micro Finance Institutions (MFIs) are the classic examples for providing easy & affordable credit to poor people and have got written innumerable success stories.
• This phenomenon of financial inclusion also helps government plug gaps & leakages in public subsidies & welfare programmes as government can directly transfer the subsidy amount into the account of the beneficiary rather than to subsidise the product.
• In fact, the Government has even saved by around more than Rs. 57,000 crores in its subsidy bill and has ensured that the benefit of the subsidy reaches to the real beneficiary directly to him/her.
Financial Inclusion: Definition
According to WB, Financial inclusion means everyone is given access to:
• BANKING– Savings & payment (through ATM, cheques, e-transfer etc.)
• CREDIT– loans @affordable interest rates.
• INVESTMENT– mutual funds, pension plans, child investment plans etc.
• INSURANCE– life insurance and non-life (general) insurance.
Financial Inclusion: Steps taken so far
Access to Banking
• Creation of State Bank of India in 1955;
• Nationalisation of commercial banks in 1969 and 1980;
• Initiating the Lead Bank Scheme in 1970; was a big step to expand financial inclusion.
• Government launched Swabhiman project to extend banking services to rural areas.
• RBI permitted Business Correspondents (BC) system. Banks extend their services to villagers with help of these agents.
• RBI permitted White label ATMs, and ordered the companies to open 2/3rd of these ATMs in semi urban and rural areas.
• RBI has ordered the banks to open at least 25 per cent of their new branches in unbanked rural centres.
• Branch licensing norms with focus on rural and semi urban branches.
• Establishment of Regional rural banks in 1975 are also the major steps for same aim which encourage branch expansion in rural area. It also regulate interest rate ceiling for credit in weaker sections.
• The Indian Government launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) in order to provide financial services and products to individuals who do not have access to a bank account.
• Opening up of Small banks and Payment banks
• After 1990s there are major important steps taken for financial excluded people as launching Self help groups linkage programmed in1992 by NABARD, which facilitates and provides door step banking.
• Simplifications of Know your customer (KYC) norms are another milestone. Where NGOs are set up to organize the poor, build their capacities and facilitates the process of empowering them.
Giving Access to Credit (Loans)
• Priority sector lending norms
• National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 mainly to provide refinance to the banks extending credit to agriculture,
• In 1998 Kisan credit card has been launched and on the suggestion of NABARD in 2005 General credit card has been launched which facility up to Rs. 25000/-.
• In January 2006 NGOs, SHGs, AND Micro Finance Institutions are permitted by RBI. Now MFIs currently cover 8.3 million borrowers. MFIs, self-help groups (SHGs) also meet the financial service requirements of the poorer segments.
• Interest Subvention scheme for farmers.
• Debt relief to farmers
• Establishment of Mudra Bank to refinance MSMEs
• Stand UP India Scheme
• Rashtriya Mahila Kosh under Ministry of Women and Child Development to ptovide loans to poor and needy women at concessional rates.
Giving More Access to Investment
• National Savings certificates
• Public Provident Funds
• New Pension Scheme
• Rajiv Gandhi Equity Savings Scheme
• Inflation indexed bonds
Giving Access to Insurance
• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY)- These schemes are offered/administered through both public and private sector insurance companies, in tie up with scheduled commercial banks, regional rural banks and cooperative banks.
• Pradhan Mantri Fasal Bima Yojana (PMFBY): It provides comprehensive crop insurance cover against non-preventable natural risks at an affordable rate to farmers.
• Pradhan Mantri Jan Arogya Yojana (PMJAY) – Ayushman Bharat
• Varishtha Pension Bima Yojana
• Pradhan Mantri Vaya Vandana Yojana(PMVVY)
• Rashtriya Swasthya Bima Yojna