Financial Inclusion in India: Progress for the Poorest - A Policy Guide Review

This is a review of the CPAN's Financial Inclusion Policy Guide, by Manuela Kristin Günther

Financial inclusion has become a hot topic in the field of poverty eradication and prevention of impoverishment. Many countries have now set targets for 100% inclusion by 2025. In recent times, India has been on the global forefront of Government-led interventions, rapidly advancing towards near-universal financial inclusion. India lends itself as an interesting case study, being the second most populous country in the world with over 1.2 billion people, of which 25% live below the World Bank's international poverty line of US$1.25 per day (2011).

CPAN’s Financial Inclusion Policy Guide (Smith, Scott, and Shepherd, 2015) highlights four avenues through which the poorest can be linked with financial services. Taking reference to three of these four pathways, I highlight the progress achieved in India and obstacles that are yet to be overcome.[1]

1.       Linking Formal and Informal Financial Systems

In order to attain inclusion of the poorest, Smith et al. (2015) stress the importance of linking formal and informal financial services. In India, as early as 1992, a synthesis of the formal financial sector and the informal one became a major part of the country’s financial inclusion strategy. Small group-based savings and credit associations, so called Self-Help-Groups (SHGs) were linked with formal bank accounts. With a vast outreach: in 2015, the SHG-bank linkage programme touches 101 million households through 7.9 million SHGs.[2] This synthesis lay the groundwork for future initiatives. In 2006, banks were allowed to use SHGs, Microfinance Institutions (MFI) and other non-formal financial providers as business correspondents (agents) to extent formal services.

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In August 2014, India went one step further by launching what is known as the world’s largest financial inclusion initiative, the Pradhan Mantri Jan-Dhan Yojana (PMJDY). More than 200 million new bank accounts were opened under the PMJDY scheme. Figure 1, drawing on recent Financial Inclusion Insights surveys (FII), illustrates the impact on bank account ownership. The proportion of adults (15 years +) with a registered bank account has increased from 47% in 2013 to 66% in 2015.[3] Figure 2 shows that the surge in bank account ownership has been strongest for the two poorest income quintiles.[4] Nonetheless, not having enough money remains the top reason for not holding a formal account. With view to households at large, India’s first FinScope survey (n=16,000) reveals that households in which at least one member holds a bank account, amount to over 90%.[5] What is the most striking is that is that even after controlling for other characteristics, bank account ownership has increased the most among the formerly un- or underbanked: e.g. females, lowest income quintiles, lowly educated, and rural individuals (Gunther, forthcoming).

Keeping in mind that financial inclusion needs to go beyond merely banking the unbanked, it is evident that some obstacles remain in India. While figure 3 shows that even the poorest bank account holders save formally, progress in account use (defined as any financial transaction in the past 90 days) has been less substantial for the most marginalised than that of account ownership. Furthermore, the full potential of bank agents that were introduced to reach the most marginalised, is yet to be reached. Bank agents seem to play a role in account openings but not in account use (ibid).

2.       Linking Social Protection with Financial Services

Smith et al. (2015) further highlight the role digitized social protection payments, also called Government-to Person-Payments (G2P) can play in financially including chronically poor households. However, before digitizing benefit payments, easier access to bank accounts for all of society, especially poor households, has to be ensured (ibid).

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India has taken various steps in this direction. In 2005 the Reserve Bank of India (RBI), India’s central bank, introduced no- or minimum balance accounts, so called ‘no-frills’ accounts, and lowered Know Your Customer (KYC) requirements. Seeing that the poor often do not hold government-issued identification cards, the Government of India introduced unique IDs, so called Aadhaar card, in 2010. Recent survey data shows that in 2015, ownership of Aadhaar cards among individuals living below poverty line was evening out relative to that of individuals living above poverty line (81% vs. 87%). As an additional feature, Aadhaar cards are linked to the digitization of G2P payments. In 2015, nearly 27% of surveyed individuals receive G2P.[6] Gunther (forthcoming) shows that after controlling for individual and household characteristics, the marginal effect of G2P on bank account ownership is 19 percentage points. Of those who receive G2P, about 59% receive it in their bank account. Figure 4 shows that this is still proportionally larger for higher income quintiles. The marginal effect on account use (defined as any financial transaction in the past 90 days) is, however, smaller with an increased likelihood of 9 percentage points (ibid).

3.       Harvesting the Digital Revolution for the Poorest

CPAN’s policy guide on Financial Inclusion (Smith et al.2015) further stipulate how new technologies such as mobile money can bring financial services closer to the chronically poor. Despite recent changes in regulations at the end of 2014, and the launch of new payment banks that are to increase mobile money networks in India, a surge in mobile money accounts is not (yet) reflected in the data. While about 8% of total respondents (n=45,036) have heard of mobile money, merely 1% use mobile money in India in 2015. Reaching the chronically poor through mobile money could also remain problematic. Despite growing coverage, - nearly 90% of all households at large and on average nearly 60% of all adults (15 years +) own a mobile phone in India in 2015 – only 40% of individuals in the poorest income quintile do so (see figure 5). Increased use of formal financial services for the poorest through new digital technologies thus remains an untapped potential in India. 

M. Günther is one of ODI’s first Financial Inclusion Fellows. She recently completed a one year secondment to the Centre for Advanced Financial Research and Learning (CAFRAL) at the Reserve Bank of India. 

Click here to download the full Financial Inclusion Policy Guide

[1] The fourth pathway ‘Scaling-up weather index base insurance’ is excluded due to a lack of nationally representative data for all of India. Only state-specific case studies are available.

[2] Status of Microfinance in India (2015-2016). NABARD.

[3] It is important to note that the surveys are not a panel but pooled cross-sectional data. Furthermore, the surveys oversample poor households relative to the Indian Census 2011.

[4] Income in the Financial Inclusion Insights Surveys in proxied by the Grameen Progress out of Poverty Index:

[5]   As of the year 2016, the Indian Government claims that 100% of household are included:

[6] Here, G2P entails not only pro-poor subsidies but also pension and disability assistance.