What is Financial Inclusion?

Financial inclusion refers to facilitating access to and use of banking and financial services at an affordable cost to disadvantaged and low-income groups. With specific reference to India, 2017 data indicates that 62.5% of Indian men and 42.6% of Indian women held an account with a formal financial institution—these numbers are even lower in rural India.

The existing network of financial institutions is inadequate to fulfill the needs of the Indian population and fails to foster financial inclusion. While banks are plentiful in urban and suburban areas, the existence of financial services in rural India is negligible. Only about 10% of India’s rural population has access to the most basic financial services like bank accounts, credit, and small-scale investment opportunities. The formal financial sector has failed to penetrate India’s rural communities, effectively isolating some of India’s most vulnerable populations from accessing financial resources that promote economic growth.

Beyond traditional financial institutions of the brick-and-mortar variety, there exists electronic banking solutions. The telecommunications sector in India is booming and holds great potential for both electronic and mobile banking. Although, as of 2015, only 0.3% of adults were using electronic banking solutions. The cost of banking via a branch in India is 43 times higher than using mobile banking, while internet banking is twice as expensive as mobile banking. Due to low cost and the vastness of India’s telecommunications network, electronic and mobile banking could be promising solutions to increase financial inclusion in India.

What is the Government of India doing to help?

Over one-third of the world’s poor live in India and lack access to financial services; as a result, financial inclusion has been on the minds of the Government of India for decades. Two recent initiatives are worth taking a look at: the Jan Dhan Financial Inclusion Plan and the Aadhaar Program.

Source: https://commons.wikimedia.org/wiki/File:A_sample_of_Aadhaar_card.jpg

Launched in 2014, the Jan Dhan Yojana Financial Inclusion Plan aimed to bring banking services to 75 million households by January 26, 2015. The Plan centered around a package deal being offered by banks to every new account holder, which consisted of a RuPay debit card, a RuPay Kisan credit card, overdraft of Rs 5,000 after 6 months of account operation, accident insurance coverage of Rs 100,000, and life insurance coverage of Rs 30,000 if opened before January 26, 2015. Within the first week, 18.1 million bank accounts were opened across India. The Plan was ultimately a failure because 54% of accounts opened under the Plan have always had balances of Rs 0. While studies claim that 31% of households in India acquired accounts under the Plan, the reality is that majority of these accounts are secondary to accounts already in use before the Plan’s conception. Therefore, the tangible benefit to financial inclusion that the Plan has had is questionable.

Objectively, a more successful initiative of the Government of India is the Aadhaar Program—the world’s largest biometric ID program, which provides each individual with a unique 12-digit identification number to allow for easy identification via digital platforms. Indians are able to access financial services with greater ease through Aadhaar-enabled bank accounts, direct benefit transfers from the government, and Aadhar-enabled payment systems and ATMs. Over 1.2 million Indians are registered with the Aadhaar Program, which runs on a voluntary basis. By providing only one number per person that is valid throughout all of India, Aadhaar ensures that anyone can have access to financial services. In terms of financial inclusion, the Aadhaar program was a win for the Government of India.

Where to next?

It is clear that the Government of India has financial inclusion on its radar when looking at recent policy initiatives. In fact, things have improved dramatically in recent years. As of 2018, approximately 80% of Indian households held at least one account at a formal financial institution. This, coupled with the success of the Aadhaar program, makes things look promising for the future. The question is: where do we go from here?

Future policy responses should look at the potential of India’s vast mobile and telecommunications networks, and seek to fulfill their potential in terms of delivering financial services. Moreover, sound policy suggestions will take into consideration the differing circumstances of rural and urban India, cater towards the needs of India’s diverse language groups, and identify important gender considerations.



Karly Hurlock is an MA candidate at the Norman Paterson School of International Affairs, where she specializes in International Development Policy. She completed her BA in History and Political Science at the University of Guelph, followed by an MA in History at Carleton University. Her previous research focused on the effects of Indian nuclear policy on Canadian development assistance to India. Her research interests include: Canadian relations with South Asia, migration and remittances, and the history of Canadian aid. Karly can be reached at karly.hurlock@carleton.ca.

Image courtesy of Pixabay

The views expressed in this article are the author’s own and do not necessarily reflect iAffairs’ editorial stance.

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