Why Is financial inclusion in India not improving? New numbers, new approaches

Despite huge potential, financial inclusion isn’t improving in India. This blog takes into account the main reasons for hindering the growth with new research findings.

No one really disputes the idea that both financial inclusion (defined by the Reserve Bank of India (RBI) in a recent report as “the spread of financial institutions and financial services across the country”) and financial depth (which India’s central bank describes as “the percentage of credit to GDP at various levels of the economy”) are important, necessary—and very possibly in trouble.

At least in India. Others around the globe, including of course the World Bank, agree that formal banking and related services may help improve economic prospects for the estimated 2.5 billion currently unbanked. They also readily acknowledge the problems involved.

Almost none of these others, however, have quite the same daunting numbers and demographics that India must deal with—269.3 million, or 22 percent of the population, living below the national Planning Commission’s poverty line of Rs.26-Rs.33 (45-55 cents) per day, depending on the area, already far less than the $1.25/day World Bank norm for “extreme poverty”.  And approximately double the numbers politically-defined as “poor” are still unable to read a bank statement.

In the past five years, RBI has worked harder than many central banks in developing countries to offer at least limited financial services, especially in rural villages, and to coerce retail banks to comply with financial inclusion directives. Nevertheless, RBI’s recently released Mor Committee Report, referred to above, reveals new and worrisome realities:

–          Almost 90 percent of small businesses in India still have no links with formal financial institutions

–          60 percent of the rural and urban population do not have a functional bank account.

–          Bank credit to GDP ratio in the country as a whole is 70 percent, but in a large, very poor state such as Bihar, it is dramatically less at 16 percent.

–          Savings, even for the not so very poor, are declining and, in certain areas, moving away from financial to physical assets. And less than fully regulated savings often include less than fully scrupulous providers.

  • Reasons cited for this trend include lack of positive real return and difficulties in quick, direct access to savings accounts.
  • Savings as a proportion to GDP have fallen from 36.8 percent in 2007-08 to 30.8 percent in 2011-12 (most recent figures available) and household financial savings declined from 11.6 percent of GDP to 8 percent during the same period.

–        Credit and access to equitable financing for low-income households and small businesses is, in very poor areas, even less encouraging.

  • Many retail banks fail to comply with RBI’s Priority Sector Lending (PSL) guidelines, which require a full 40 percent of their lending to these sectors, for the simple reason that their non-performing assets (NPAs) are almost double.

For more on Mor Committee, please see MicroSave’s blogs:

Independent, external sources fail to paint a rosier picture. The World Bank’s Global Findex pegs India’s unbanked at 65 percent, not 60, and note that only 4 percent use formal bank accounts to receive welfare payments. In theory, all beneficiaries of India’s many, various welfare and pension must have a basic savings account. The reality is that many districts still use CICO (cash in/cash out) agents for distribution. A MicroSave overview explains some of the reasons why.

Of the 182 million-plus such accounts that are on RBI’s books, at least half—possibly far more—are either dormant or “pass-through” accounts only. (Beneficiaries pull out their full government disbursement each month and fail to save in small increments or invest in micro-insurance policies).

So, if full financial inclusion is NOT happening in India, and probably not even progressing by most important metrics, why is this the case and how might things improve?

MicroSave has spent the last several years trying to answer these questions by talking directly to the financially excluded all over India, to the bankers required by RBI to serve their needs, to the “business correspondent” managers and agents in both urban and rural locations who actually do serve their needs, and to the RBI and other policy-makers who are in fact trying hard to make this work.

Our research indicates the following key culprits:

–         Skewed incentive structures for the agents that only rewards account opening, not transactions and active account use;

–           The wrong products and services for this clientele who need, and are willing to pay for,  more “normal” services such as ATM cards and limited, short-term credit;

–       Poor and wrongly targeted marketing and promotion efforts for the few such as recurring flexible savings deposits and remittances which do seem viable. More corporate marketing strategies—like the campaigns one sees everywhere in India for soft drinks and mobile subscriptions—would work more effectively for these targets.

–          Lack of CICO agents, despite the claims of widespread networks by the banks, in reality very few CICO agents are functional and able to transact.

–          All made worse by customers’ limited trust in the few CICO agents that actually exist (who run out of cash, cope poorly with bad technology, and can’t resolve even simple grievances), and their—usually correct—perception of disrespect and equally inadequate service at bank branches.

–        Banks’ limited enthusiasm for low-net-worth customers and most aspects of financial inclusion (please see “Credit” and NPAs above and related MicroSave research on this topic).

This is the short list. For the much longer litany of woes, please visit MicroSave’s online library and type in “financial inclusion” or whatever keywords best suit your needs.

India is not alone in needing to address these and related problems—and, no, technology, mobile operators, and global credit-card brands are not the all-purpose solutions some would have us believe. As the world’s largest democracy and second-most-populous nation, India has a certain responsibility to think more creatively and implement more effectively for full financial inclusion. If and when it does, the rewards will also be that much more noteworthy and gratifying for all involved.

Leave comments

Written by


Ritesh Dhawan

Digital Finance Expert