National Council of Applied Economic Research
Opinion: C S Mohapatra.
Enhanced financial inclusion and financial literacy are crucial in empowering individuals to navigate financial systems, access credit, and leverage digital platforms effectively.
Financial inclusion in India has traditionally been equated with the expansion of banking networks and the proliferation of bank accounts among the underserved.
However, complete and effective financial inclusion encompasses far more layers than just owning a bank account. It implies, inter-alia access to a comprehensive set of financial services that include savings, credit, insurance, and payments – tailored to meet the diverse needs of individuals, particularly the marginalized and underserved sections of society.
India’s journey towards financial inclusion and literacy has seen considerable progress with the Pradhan Mantri Jan-Dhan Yojana (PMJDY). Nine years post-launch, no-frills bank accounts continue to witness a steady increase, boasting a cash balance of ₹2.03 lakh crore as of 2023. The financial year 2023 saw the opening of 35.9 million new PMJDY accounts, a rise from 28.6 million in FY22 and slightly less than 38.7 million in FY21.
Despite this remarkable surge, a large number of accounts remain inactive or face duplication, signaling the need for more robust financial literacy and engagement strategies.
Between 2014 and 2017, India saw a remarkable 26 percentage point increase in account ownership, largely due to PMJDY, compared to a global increase of 6.57 percentage points only during the same period.
The Global Findex data from 2021 provides an insightful snapshot into India’s evolving financial inclusion landscape, marked by significant digital adoption and changing saving and borrowing behaviors. According to Findex, India experienced a slight percentage decline in account ownership from 80% to 77% from 2017 to 2021, highlighting the need for another round of intensified financial inclusion efforts. This period has also observed a concerning decrease in savings at financial institutions, which declined from 20% in 2017 to 13% in 2021 across all demographics.
Comprehensive financial inclusion embodies the multifaceted access to financial services that cater to the varied needs of the population. India has the second largest number of the world’s population lacking access to formal banking services, totaling 130 million, just next to China.
The mere existence of a bank account again does not guarantee financial inclusivity. A 2017 World Bank report highlighted that about 48% of bank accounts in India were inactive, underscoring the gap between account ownership and meaningful financial participation. The presence of dormant accounts and reluctance to engage fully with financial markets often stem from insufficient financial literacy, a need for ongoing hand-holding of investors, and simplicity of financial products, and unbiased expert advice.
So, how do we encourage more active usage of these accounts?
Credit accessibility remains a critical pillar, with the MSME sector and low-income households often ensnared by the high costs of informal lending despite the availability of microfinance options. Similarly, low insurance penetration highlights the gaps in risk management and protection against unforeseen life events. Investment and wealth-building opportunities through mutual funds, pensions, and government savings schemes represent another dimension of financial inclusion, enabling individuals to secure their financial futures.
Technological advancements in recent years have revolutionized the banking sector, with almost all financial institutions now utilizing technology to expand and improve their services and products. Furthermore, RBI’s Central Bank Digital Currency (CBDC) pilot signals a major move towards adopting digital currency. This has aided financial inclusion with the surge in digital transactions. However, digital literacy and access underscores the need for a more inclusive digital financial landscape.
While digital financial services are penetrating fast into our lives, a large number of inactive accounts demand a focused financial literacy campaign with the availability of simple financial products and unbiased financial advice for maximizing the financial well-being of most of the population.
Enhanced financial inclusion and financial literacy are crucial in empowering individuals to navigate financial systems, access credit, and leverage digital platforms effectively. Tailoring financial products to meet the specific needs of diverse groups, including women, small entrepreneurs, and rural communities are among the tasks unfinished.
Strengthening digital infrastructure, facilitating access to fintech solutions, and innovative and inclusive regulatory frameworks have become essential ingredients of our financial ecosystem, the cornerstone of deepening financial inclusion, and ensuring that financial services are accessible, affordable, and relevant to all segments of society.
The National Strategy for Financial Inclusion (NSFI) 2019-24 sets forth the vision and key objectives of financial inclusion policies in India, with an emphasis on enhancing digital financial inclusion. NSFI, tasked with promoting financial literacy in the country with the ‘5 C Approach’ of the National Strategy for Financial Education (NSFE) which includes- improvement of content, capacity building, community-led model, effective communication strategy and collaborative strategy, is taking further steps in this direction.
The new generation, seeing more frequent global financial transitions and challenges, with an overload of information and social media pressures, is unclear about financial planning. How can we make financial education more engaging and impactful for them?
An online study suggests, over two-fifths of Gen Z and millennials suffer from distorted financial perception. In addition to age-old ways of financial inclusion and giving financial access to the general population, a focused approach to bring clarity or financial planning for youth may be helpful.
Introduction of a 6th C- a class or group-oriented approach to NSFE strategy will help address the unique financial challenges faced by specific groups, such as homemakers, senior citizens/retirees, college students/youths, and school children.
How can we build a deeper trust in financial institutions and financial markets? A simple yet efficient grievance redress system, enhanced trust-building measures and regulatory reforms can address issues like misinformation and fraud that undermine public trust.
Addressing these requires a concerted effort for effective fraud prevention, early detection, and effective communication of the actions taken by regulatory authorities. Setting up a Financial Redress Agency as a unified agency across all financial sectors, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC), will improve grievance redressal and build confidence to stay in the market.
The indispensable role of financial advisors, providing impartial advice with clear disclosures, becomes ever more critical. Unrealistic or biased advice from ‘finfluencers,’ and advisors can cause prospective financial investors to stay away from financial markets.
Financial inclusion in India is a multidimensional challenge. India’s strides in financial inclusion and literacy underscore a comprehensive multi-layered approach to ensuring equitable access to financial services. However, the presence of inactive accounts and the need for a renewed focus on financial education highlight areas for further development.
There is an urgent need to combine financial inclusion efforts with comprehensive sustained financial education efforts and set up a unified grievance redress system. This strategy will support India’s economic growth by ensuring that financial services are accessible to all citizens.
The author is a former official of the Indian Economic Service and IEPF Chair at National Council of Applied Economic Research, Views are personal.