New Momentum to India’s Financial Inclusion


Moin Qazi – TRANSCEND Media Service

8 Mar 2018 – India’s financial inclusion index, CRISIL Inclusix’s readings for fiscal 2016 (the latest for which figures are available) has cheerful news. Financial inclusion has improved significantly, with the all-India score surging to 58.0 in fiscal 2016, compared with 50.1 in fiscal 2013.

The index measures progress on financial inclusion in each of the 666 districts in the country based on data provided by RBI, the Microfinance Institution Network (MFIN), and the Insurance Information Bureau of India. It is based on four indices—deposit penetration, credit penetration, insurance penetration and branch penetration. It uses a statistically robust, transparent, and easy, to understand methodology, and is based on a modular, scalable architecture. Insurance penetration has been added as a new indice this year, making the index a more comprehensive barometer.

There has been a marked increase in both deposit and loan accounts. Nearly 600 million deposit accounts were opened between fiscals 2013 and 2016, or twice the number between 2010 and 2013.  This is reflected in the surge of deposit penetration by over 16 points. On the credit side, there was a sharp increase of 31.7 million new credit or loan accounts (banks and MFIs) s in the two years up to fiscal 2016, which is the most since fiscal 2013.

  • Branch Penetration it is measured as number of bank branches per one lakh population. This refers to the penetration of commercial bank branches and ATMs for the provision of maximum formal financial services to the rural population.
  • Credit Penetration –it takes the average of the three measures: number of loan accounts per one lakh population, number of small borrower loan accounts per one lakh population and number of agriculture advances per one lakh population.
  • Deposit Penetration it is measured as the number of saving deposit accounts per one lakh population.
  • Insurance Penetration it is measured as the ratio of premium underwritten in a particular year to the GDP.

Financial services are like clean water and electricity—they are essential to leading a better life. The frenetic global efforts to bring those outside the financial world into it are part of a philosophy popularly called ‘financial inclusion’. Greater financial inclusiveness is a gateway for more balanced development and a more cohesive society.

Financial inclusion implies an absence of obstacles to the use of these services, whether the obstacles are price or nonprice barriers to finance. It is important to distinguish between access to – the possibility to use – and actual use of financial services. Exclusion can be voluntary, where a person or business has access to services but no need to use them, or involuntary, where price barriers or discrimination, for example, bar access. Failure to make this distinction can complicate efforts to define and measure access. Financial market imperfections, such as information asymmetries and transaction costs, are likely to be highly imposing on the talented poor and on micro- and small enterprises that lack collateral, credit histories, and connections.

Without inclusive financial systems, these individuals and enterprises with promising opportunities have their capital constrained to their own savings and earnings. This access dimension of financial development has often been overlooked, mainly because of serious data gaps on who has access to which financial services and a lack of systematic information on the barriers to broader access.

Access to the right financial tools at critical moments can be a key element in overcoming the stubborn realities for those who operate in penny economies. It can provide them an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. The poor need to set aside money in times of plenty and draw it out in lean times. Without a safe place to save money, it’s difficult to cope with the unexpected or to plan for the future. Improved access to finance increases savings, reduces poverty and promotes employment. Without access to affordable credit, it’s difficult to get a business idea off the ground or to acquire an asset like a house. In the absence of insurance, all your security can be wiped out by one misfortune. Financial services allow you to insure for health care, save for children’s education, and borrow for wedding or funeral costs.

A bank account acts as a means of fulfilling these needs. However, merely opening accounts for the unbanked will not help unless they are actively used them for managing their money. To make this possible people have to be given the ability to understand and execute matters of personal finance, including basic numeracy and literacy, budgeting, investing, and risk diversification. This skill is known as financial literacy. It is a combination of financial awareness,   attitudinal and behavioural changes necessary to make sound financial decisions. It’s necessary to  teach them the basic nuances of finance so that they   keep  distance from unscrupulous and dubious investment schemes that have lacerated the financial lives of so many  after they got into  serious  mess with them..

The challenge of financial inclusion is to understand what is best about all the different ways of reaching underserved customers. It is about understanding what works and building on it. The Consultative Group to Assist the Poor (CGAP), the development arm of the World Bank puts it well:

“The financial system is, in a sense, the nerve system of an economy. It is the platform used for market transactions to occur, the means by which governments distribute benefits, and the mechanism used by citizens to demonstrate their civic responsibilities by payment of taxes and government services. Ensuring the financial system is inclusive is paramount in the process of creating a more inclusive, equal and peaceful society.”

With billions of people already using mobile phones, the means to introduce people to formal banking and financial services already exist. Technology has enabled contact with villages half a day away from bank branches and unreachable by road. This has transformed both business and family life. The rapid spread of mobile phones is the game changer that can make the economic benefits from digital finance possible.Fortunately; mobile phone penetration is growing far more quickly than access to financial services.

The father of behavioural economics Richard Thaler has generated enthusiasm about his nudge theory when he won the Nobel Prize earlier this month. Unlike normal economic theories that assume that all participants can take rational decisions, behavioural economics says that as mere human beings, we are prone to irrational actions and therefore, need to be “nudged” in the right direction. The same is true with finance. To use financial services to their full potential, the low income people need products well suited to their needs and appropriate training and education for adapting to these financial services.

The issue is lot more nuanced than what we see or imagine today. Nuances change from culture to culture and consumer segment to consumer segment. Consumers will come into the formal financial sector and embrace the new opportunities  only when they believe that if they change their behaviour and exert the effort to get into the new world then certain specific pains will disappear. We must strive to develop tools that empower lower income people to take charge of their financial health and hygiene. We have thus to address real pains, not just offer benefits. If the industry’s priorities are tweaked even slightly in favour of the poor, barriers to inclusion would fall.

Let us not forget the lessons of the past.The milestones which we have recorded in our financial inclusion journey should spur us forward with renewed vigour. Let us not reduce them to mere flag posts and consign our financial revolution to the driftwood of history. Instead of looking back and resting on our laurels, we should look forward to leading the revolution to its goalpost.

Financial inclusion should not end with just opening accounts. The customer must make this account his financial diary and conduct transactions which can grow into a credit history. Or else all these accounts would remain deadweight. What needs to be done is to make more and more of these accounts actually transactional, and actively transactional. Once in a way the subsidy also comes in, so that’s the first set of transactions. But after that, [what is important is] getting the customers used to the habit of saving, getting them to use formal channels for the remittance of money and then, through the way the money comes into the account, building some kind of credit analytics and making small loans and micro insurance available to them. The state diktats which foist targets for opening accounts are a big eyewash. What is needed is motivation of frontline staff so that they nudge the customers to make banking a regular habit despite huge resources both in terms of capital, manpower and technology, banks’ lack of staff commitment and poor human resource policies have ensured that financial inclusion will remain a vain chimera for them. Most banks have ramped up their rural banking outfits but these efforts are mere drops in the bucket.


Moin Qazi, PhD Economics, PhD English, is a member of the TRANSCEND Network for Peace Development Environment and author of the bestselling book, Village Diary of a Heretic Banker. He has worked in the development finance sector for almost four decades in India and can be reached at


This article originally appeared on Transcend Media Service (TMS) on 12 Mar 2018.

Anticopyright: Editorials and articles originated on TMS may be freely reprinted, disseminated, translated and used as background material, provided an acknowledgement and link to the source, TMS: New Momentum to India’s Financial Inclusion, is included. Thank you.

If you enjoyed this article, please donate to TMS to join the growing list of TMS Supporters.

Share this article:

Creative Commons License
This work is licensed under a CC BY-NC 4.0 License.

Comments are closed.