Financial Inclusion, Meaning, Status, Importance, Challenges

Financial inclusion refers to ensuring that individuals and businesses can access essential financial products and services, such as savings accounts, loans, insurance, and payment services, at affordable prices. Financial inclusion aims to eliminate the barriers that prevent people from participating in the financial sector and using its services to improve their lives. It is also known as inclusive finance.

In India, financial inclusion has been pivotal for poverty alleviation, bridging the income divide, and supporting national economic objectives. By fostering financial literacy, promoting digital banking, and improving access to formal banking channels, financial inclusion aims to achieve sustainable economic and social equity.

What is Financial Inclusion?

Financial inclusion is an effort to make everyday financial services more affordable to a wider range of the global population. Financial inclusion can refer to geographical regions, consumers of a particular gender, consumers of a certain age, or other marginalised groups. Financial inclusion may result in increased overall innovation, economic growth, and consumer knowledge.

• Objectives: Financial inclusion aims to offer essential financial services, including basic no-frills accounts for payments, savings and pension products, simple credit and overdrafts, money transfer options, micro-insurance, and micro-pension solutions.
• Working: Financial inclusion ensures accessible, affordable financial services for all, regardless of income or location. 
  • It promotes economic stability by enabling universal access to banking, credit, and insurance, empowering individuals to participate in the formal financial system.

Financial Inclusion Current State in India

India has made significant strides in promoting financial inclusion, but gaps remain. In consultation with the concerned stakeholders, including the government, the Reserve Bank of India constructed FI-Index to capture the extent of financial inclusion across the country.

• Overall Banking: According to the World Bank Global Findex Database (2021), about 78% of Indian adults have bank accounts. 
  • However, account usage and access to credit continue to be low.
• Digital Payment: UPI has transformed digital payments nationwide; at a compound annual growth rate (CAGR) of 129%, UPI transaction volume increased from 92 crore in FY 2017–18 to 13,116 crore in FY 2023–24.
• Gender Disparity: According to the National Statistical Office's "Women and Men in India 2023" report, women account holders account for only 20.8%, or roughly one-fifth, of total bank deposits in India.
• Presence of Informal Banking: Despite progress, disparities in financial inclusion persist, with rural and low-income groups having limited access. Many still depend on informal, often costly financial services like moneylenders and savings groups.
• FI-Index: The RBI Financial Inclusion Index (FI-Index) for March 2024 was 64.2, up from 60.1 in March 2023. This indicates that financial inclusion in India is improving, with growth across all parameters.

Financial Inclusion Initiatives in India

The Government of India has implemented various financial inclusion initiatives to enhance access to banking and financial services, such as PMJDY, PM Mudra Yojana, UPI, and Kisan Credit Card, ensuring financial empowerment for all citizens.

• Pradhan Mantri Jan Dhan Yojana (PMJDY): Launched in 2014, PMJDY is the world’s largest financial inclusion initiative, aiming to provide bank accounts to every household in India. 
  • The scheme offers zero-balance accounts, accident insurance up to Rs 1 lakh, and overdraft facilities of up to Rs 10,000, providing financial security and emergency support to eligible holders.
  • Under PMJDY, over 53 crore bank accounts have been opened by August 2024, ensuring basic savings, overdraft facilities, and accidental insurance.
  • This ambitious program forms a crucial pillar of the JAM trinity (Jan Dhan-Aadhaar-Mobile), which serves as a powerful tool for direct benefit transfers and financial inclusion
• Pradhan Mantri Mudra Yojana: This scheme provides loans to micro and small enterprises to help them start or expand their businesses. Since its inception, as of April 2023, MUDRA has disbursed over ₹23 lakh crore to MSMEs, fueling entrepreneurship and employment in low-income communities.
• Unified Payments Interface (UPI): UPI revolutionised digital transactions in India by providing a real-time payment system through smartphones. 
  • By 2023, UPI processed over 14 billion transactions per month.
• Banking Correspondents Model: It promotes financial inclusion by deploying representatives to offer banking services in remote, unbanked areas. These agents handle deposits, withdrawals, microfinance loans, and essential banking functions.
• Kisan Credit Card: The Kisan Credit Card (KCC) scheme is a financial inclusion initiative launched by the Government of India in 1998 to provide easy and hassle-free credit to farmers to meet their short-term and medium-term credit needs. 
  • The scheme allows farmers to access credit from banks and financial institutions through a simple and convenient process, eliminating the need for collateral or other guarantees.
• Insurance Schemes: 
  • PM Suraksha Bima Yojana (2015) provides accidental insurance coverage to the account holders of Jan Dhan Yojana. 
  • Pradhan Mantri Jeevan Jyoti Bima Yojana (2015) provides term insurance coverage to the account holders of Jan Dhan Yojana.
• Digital Literacy Programs: The government has launched the Digital India program to enhance digital literacy, particularly in rural areas, ensuring citizens can access online financial services and benefit from them effectively.

National Strategy for Financial Inclusion

The National Strategy for Financial Inclusion (NSFI) 2019-2024, developed by the Reserve Bank of India, aims to create a robust, accessible, and inclusive financial ecosystem in India. It sets forth the vision and key objectives of financial inclusion policies in India.

• Objectives: The RBI aims to reduce disparities in access to finance, boost digital literacy, and ensure the availability and affordability of credit for individuals and MSMEs by 2024.
• Strategic Pillars: The main strategic pillars include ensuring universal financial access, offering essential financial services, promoting livelihood and skill development, enhancing financial literacy and education, safeguarding customer rights with grievance redressal, and ensuring effective interagency coordination.

Financial Inclusion Importance

Financial inclusion is crucial for economic growth, poverty reduction, and social equity. It empowers marginalised communities, especially women, supports entrepreneurship, and promotes digital and social inclusion, contributing to a more inclusive, resilient society.

• Economic Growth: Financial inclusion fuels economic growth by enabling all individuals, especially the underserved, to engage in economic activities. It promotes savings, investments, and productivity, which in turn boost national GDP.
• Poverty Reduction: Access to financial services allows low-income individuals to save, borrow, and manage risks, breaking the cycle of poverty. It provides a safety net, helping people build assets and reduce economic vulnerability.
• Women Empowerment: Financial inclusion empowers women by granting them financial independence and improving their social and economic status. It opens avenues for them to save, invest, and contribute to household income.
• Entrepreneurship and Employment: Inclusive financial access supports MSMEs by providing essential credit and fostering entrepreneurship and employment. This not only strengthens local economies but also contributes to job creation and innovation.
• Social Inclusion: Financial inclusion bridges societal divides by ensuring everyone has equal access to financial services. It promotes social equity and reduces disparities between urban and rural populations, fostering a more inclusive society.
• Digital Inclusion: Because technology plays an important role in financial inclusion, increasing access to digital financial services contributes to digital inclusion by allowing more people to participate in the digital economy.

Financial Inclusion Challenges

Financial inclusion in India faces multiple challenges, including low financial literacy, limited digital access in rural areas, gender disparities, inadequate banking infrastructure, and high service costs. These barriers hinder equitable access to essential financial services.

• Low Financial Literacy: Financial literacy remains low, especially in rural areas. Many lack the knowledge to understand and use financial services effectively, leading to the underutilisation of banking, credit, and insurance services.
• Digital Divide: Limited internet access and smartphone usage in rural and low-income areas hinder digital financial inclusion. This digital gap restricts the adoption of mobile banking, digital payments, and online financial services.
• Gender Disparities: Women face greater barriers to financial inclusion due to socio-cultural factors, limited financial literacy, and mobility restrictions. This gender gap reduces women’s participation in formal financial systems and economic independence.
• Inadequate Infrastructure: Rural and underserved areas often lack essential banking infrastructure such as ATMs, branches, and digital access points. This absence limits the reach of financial services in remote locations.
• High Cost of Services: Financial services can be expensive for low-income groups, with high interest rates for credit and fees for other services. These costs make financial access difficult for economically disadvantaged individuals.

Financial Inclusion Way Forward

The way forward for financial inclusion involves enhancing literacy, expanding digital infrastructure, introducing targeted credit schemes, creating gender-inclusive policies, strengthening fintech partnerships, and ensuring supportive policy frameworks for broader access to financial services.

• Enhancing Financial and Digital Literacy: It is crucial to increase financial literacy, especially in rural and underserved areas. Programs need to focus on educating people on the benefits of banking and digital payments, helping them become financially independent.
• Promoting Artificial Intelligence: AI could revolutionize financial inclusion by enabling language-based interactions. Nandan Nilekani highlights that AI-powered language models can allow people to access financial services in their preferred languages, potentially opening up these services to a billion people in India.
• Expanding Digital Infrastructure: Developing digital infrastructure, particularly in rural and remote areas, is essential for fostering financial inclusion. Government and private partnerships can expand internet access and digital financial services.
• Targeted Credit Schemes: Introducing affordable credit schemes tailored to the needs of low-income groups and women can encourage them to engage in entrepreneurship and self-employment.
• Gender-Inclusive Policies: Creating gender-specific policies can bridge the financial inclusion gap for women, empowering them economically and socially.
• Strengthening Fintech Partnerships: Collaborating with fintech companies can lead to innovative solutions for rural banking, micro-insurance, and instant payments, making financial services more accessible and affordable.
• Policy and Regulatory Support: A conducive regulatory environment can further enhance financial inclusion, supporting initiatives like digital KYC, flexible credit assessment, and incentivised banking expansion into underserved areas.

Financial Inclusion UPSC PYQs

Question 1: Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India. (UPSC Mains 2022)

Question 2: Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for the financial inclusion of the poor section of the Indian society? Give arguments to justify your opinion. (UPSC Mains 2016)

Question 3: With reference to India, consider the following: (UPSC Prelims 2010)

1. Nationalization of Banks
2. Formation of Regional Rural Banks
3. Adoption of village by Bank Branches

Which of the above can be considered as steps taken to achieve the “financial inclusion” in India?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 3 only

(d) 1, 2 and 3

Ans: (d)

Financial Inclusion FAQs

Q1. What is meant by financial inclusion?

Ans. Financial inclusion means responsibly and sustainably providing access to useful and affordable financial products and services to all individuals and businesses, regardless of net worth or size.

Q2. What are the 5 A's of financial inclusion?

Ans. The 5 A's of financial inclusion are Adequacy, Availability, Accessibility, Awareness, and Affordability of financial services and products for all segments of society.

Q3. What are the six pillars of financial inclusion?

Ans. The six pillars of financial inclusion are Universal Access, Basic Services, Access to Livelihood, Financial Literacy, Customer Protection, and Effective Coordination among stakeholders.

Q4. What is financial inclusion in RBI?

Ans. RBI defines financial inclusion as the process of ensuring access to appropriate financial products and services needed by vulnerable groups at an affordable cost fairly and transparently.

Q5. What are the principles of financial inclusion?

Ans. Key principles of financial inclusion are Leadership commitment, Regulatory framework, Infrastructure development, Protection and empowerment of consumers, and Cooperation among stakeholders.