Basic financial services make it easy to pay for day-to-day needs, reach goals, and run a business. However, according to the World Bank, over 2 billion adults around the world don’t have access to basic financial tools. The goal of financial inclusion strategies is to change this data, and technological advancements make it possible to have an effect on a much larger scale than ever before.
In this article, we will discuss what exactly “financial inclusion” is, how it operates, its objectives, challenges, and much more.
What is Financial Inclusion?
Financial inclusion is the process of making sure that all people in a society have access to banking and financial services and solutions without any kind of bias. Its main goal is to make everyone a part of society by giving them basic financial services regardless of how much money they make or save. Financial inclusion is mostly about making sure that people who don’t have a lot of money can get good financial help without being treated unfairly. It aims to solve financial problems without showing any signs of inequality. In addition to its commitment to transparency, the organisation provides financial assistance without any hidden fees or transactions.
Need for Financial Inclusion in India
In India, there are a lot of poor households that can’t get any kind of financial service. They don’t know what banks are or how they work. Even if they know about banks, many poor people can’t use them even if they know what they do. They might not meet the minimum requirements that banks set, so they won’t be able to use a bank’s services. Banks have requirements like a minimum annual income, a minimum credit score, an age requirement, and a minimum number of years of work experience. A bank will only give a deposit or loan to a person who meets these requirements. Many poor people may not have worked before because they don’t have enough education, resources, money, etc., or because they have never had a job.
People who aren’t doing well financially may also not have the right papers to show banks to prove their identity or income. When you apply for a loan or open a bank account, there are certain documents that every bank requires you to give them. A lot of these people don’t understand how important these documents are. They also don’t have a way to apply for official documents from the government.
Financial inclusion aims to get rid of these barriers and give low-income people access to affordable financial services so they don’t have to rely on charity or other ways to get the money that is not sustainable. Financial inclusion also aims to make people more aware of financial services and how to manage their money. Also, it wants to set up formal and organised ways for poor people to get credit.
For a long time, only people from the middle class and above could get formal forms of credit. The poor were compelled to rely on informal and unstructured forms of credit. Many of them were uneducated and lacked basic financial knowledge; as a result, they were duped by greedy and wealthy members of society. Numerous poor individuals have been exploited for years in the context of financial support.
History of Financial Inclusion in India
In 2005, the Annual Policy Statement from the Reserve Bank of India introduced the idea of financial inclusion to the Indian subcontinent. Soon, the idea began to spread to all parts of the country. It was primarily designed to reach every corner of the country without ignoring any remote areas. The concept addressed the lack of a formal financial system and banking system to meet the monetary needs of the poor.
In 2005, the Khan Committee Report was released. It mostly talked about rural credit and microfinance. It talked about how many people in the country are missing out on the benefits of a professional and licenced banking system.
The report emphasised providing access to essential financial services by assisting individuals in opening a basic bank account. All banks were told to make it easier for people with less money to open bank accounts by reducing the number of rules that had to be followed. Several banks were asked to collaborate toward 100% financial inclusion by participating in the RBI’s campaigns.
The government of India also started the “Pradhan Mantri Jan Dhan Yojna” to encourage poor people to open bank accounts. This programme wanted at least 75 million people to open bank accounts by 2015.
Objectives of Financial Inclusion
Financial inclusion is designed to help people get affordable financial services and products, like savings accounts, loans, insurance, payment services, etc.
- Its goal is to set up good financial institutions that can help poor people. These institutions should be governed by precise rules and adhere to the financial industry’s high standards.
- Financial inclusion aims to build and maintain financial sustainability so that disadvantaged people have a consistent source of funds, which is difficult for them to obtain.
- Financial inclusion also wants there to be a lot of institutions that offer cheap financial help so that there is enough competition and customers have a lot of options. Traditional banking options are available on the market. But there aren’t that many places where you can get cheap financial products and services.
- The goal of financial inclusion is to help people who don’t have a lot of money learn more about how financial services can help them.
- Financial inclusion is the process of developing financial products that are suitable for the less fortunate members of society.
- The objective of financial inclusion is to help people learn more about money and how it works.
- Financial inclusion seeks to provide digital financial services to economically disadvantaged individuals.
- It also wants to offer mobile banking or financial services so that the poorest people who live in the most remote parts of the country can get access to them.
- It aims to provide tailor-made financial solutions to low-income individuals based on their financial situations, household needs, preferences, and income levels.
There are a lot of government agencies and non-government organisations that work to make sure everyone has access to money. The main goal of these agencies is to make it easier for people to get government-approved documents. Many poor people can’t open bank accounts or get loans because they don’t have any proof of who they are. People who live in rural areas or tribal villages often don’t know about important documents like PAN, Aadhaar, Driver’s Licenses, or Electoral IDs. So, they can’t use many of the services that government and private institutions offer. Due to the lack of these documents, they are unable to receive any government subsidies to which they are legally entitled.
Financial Inclusion Schemes in India
The Indian government has been introducing several unique schemes to promote financial inclusion. These programmes are intended to provide social security for less fortunate members of society. Several financial experts and policymakers spent a lot of time planning and researching before the government launched programmes with financial inclusion in mind. These plans have been started in different years. Let’s look at a list of the country’s financial inclusion programmes:
- Pradhan Mantri Jan Dhan Yojana (PMJDY)
- Atal Pension Yojana (APY)
- Pradhan Mantri Vaya Vandana Yojana (PMVVY)
- Stand Up India Scheme
- Pradhan Mantri Mudra Yojana (PMMY)
- Pradhan Mantri Suraksha Bima Yojana (PMSBY)
- Sukanya Samriddhi Yojana
- Jeevan Suraksha Bandhan Yojana
- Credit Enhancement Guarantee Scheme (CEGS) for the Scheduled Castes (SCs)
- Venture Capital Fund for Scheduled Castes under Social Sector Initiatives
- Varishtha Pension Bima Yojana (VPBY)
Operations of Financial Inclusion
Simply, financial inclusion assists individuals in gaining convenient and affordable access to fundamental financial services. These people are part of groups who have been “financially excluded.” These populations often reside in low-income communities or developing nations. Over 50% of them are women.
It might be easiest to understand what financial inclusion does by looking at the problems it solves.
1. The informal economy
In many regions of the world, particularly rural areas, cash is supreme. Businesses are unlikely to accept digital or electronic payments, and storing cash (rather than depositing it in a bank account) is dangerous. It is difficult for businesses to acquire assets for expansion, and they may have a limited selection of trading partners.
2. Lack of a bank account
Without a bank account or transaction account, individuals often use “alternative financial services.” These services may charge more fees than regulated institutions, and they generally do not provide the same level of consumer protection. If you don’t have a bank account, you have to go out of your way to get money and pay bills, which takes time. Moreover, accounts offer a secure location for future savings. With technology, customers can bank, pay, and get paid from anywhere at a very low cost. This is emphasised since these accounts are viewed as a “gateway” to more financial services.
3. Limited access to credit
Access to credit is restricted unless you have a high credit score. However, some individuals have limited or poor credit, and certain countries do not utilise credit scores. In the absence of simple access to loans, borrowers must rely on unofficial lenders, who may demand excessive interest rates and fees.
Barriers to Financial Inclusion
- Financial inclusion is hampered by several factors, the most significant of which is extreme poverty. People with little or no money have little to no need for financial services.
- In addition to the pervasive extreme poverty that persists in many parts of the world, there are numerous other substantial obstacles that frequently make it difficult for low-income and disadvantaged individuals to receive essential financial services.
- Financial organisations frequently demand rigorous and detailed documentation requirements for opening an account or sending money. Then, those without the necessary paperwork are effectively denied access to financial services.
- Additional obstacles to financial inclusion include high minimum balance or opening account balance requirements, a lack of nearby financial institution offices, and both.
- Finally, many people who are poor or have low incomes do not know how to access or use financial services.
What is the Need for Financial Inclusion?
Financial inclusion improves the nation’s financial system overall. It improves the accessibility of financial resources. Most significantly, it makes saving more difficult for poor people living in both urban and rural locations. In this way, it consistently aids in the advancement of the economy.
Due to their precarious situation, many poor people frequently become victims of fraud and, in some cases, outright exploitation by wealthy landlords and unlicensed moneylenders. Financial inclusion can assist to change this terrible and hazardous scenario.
To secure their minimal financial resources for future needs, financial inclusion involves integrating low-income individuals into the official banking sector. There are many households with farmers or artisans who lack the means to properly save the money they make after putting so much effort into their work.
Financial Inclusion and Financial Technology (Fintech)
Fintech, often known as financial technology, is the use of cutting-edge technology in the financial sector or industry. The emergence of financial technology, or fintech, has greatly increased financial inclusion throughout the world. Numerous fintech businesses in India are also working hard to streamline the process of offering potential customers financial services. Successful fintech businesses also provide financial services and goods at low prices. Customers benefit greatly from this because their costs are minimal and they can use their savings to meet other demands.
Financial technology companies are making it possible for people in rural areas to use their cell phones to apply for loans or open bank accounts. Many people in rural areas of India have mobile phones, and some of them have access to mobile internet, so they can use fintech services to obtain trustworthy financial services.
Crowdfunding, digital payment systems, peer-to-peer (P2P), electronic wallets, and other recent fintech innovations are just a handful that people employ. Many people are using these cutting-edge banking solutions, both in urban and rural areas. But there are still a lot of untapped people who have never dealt with any type of financial institution. It is challenging for these individuals to use any financial mobile service.
When many of these poor people do financial transactions with cash or cheque, they often get ripped off by scammers. Additionally, when people go to bank or NBFC branches to open an account or seek for a loan, they can find up paying exorbitant branch fees. These costs may include transaction costs, processing costs, money order costs, etc. Banks, NBFCs, and fintech firms are working together to develop faster, easier banking procedures that will reduce extra fees to protect the poor from paying such high prices for financial services. As these procedures develop, it will be easier to include the underbanked or unbanked members of society.
Financial inclusion is a movement to make sure that people and businesses can get good financial services that are also affordable. One of the main goals is to help everyone open a bank account, which is a key to other services. Also, groups like the World Bank and FINCA are working hard to help as many people as possible become financially stable.
For there to be a success in implementing financial inclusion in India, there needs to be a multidimensional approach that encourages the development of new technological innovations while simultaneously strengthening the digital platforms, infrastructure, human resources, and policy frameworks that are already in place.
Finally, financial inclusion has the potential to magnify the benefits of economic progress for the underprivileged, but only if significant steps are taken to address the present challenges and find solutions to them.
1. What is Financial Inclusion in India?
Ans: Financial inclusion is the process of making sure that all people in a society have access to banking and financial services and solutions without any kind of bias.
2. Why Financial Inclusion is important?
Ans: The government has financial inclusion as a top objective. The goal of financial inclusion is to increase access to financial services for the nation’s sizable, previously underserved population to maximise its growth potential.
3. How are Financial Inclusion and Microfinance different?
Ans: Financial inclusion means that everyone has access to and can use services that meet their needs and are affordable. Microfinance is financial services made for low-income groups that haven’t had access to formal financial systems in the past. Microfinance companies help people who don’t have much money get access to these financial services and goods.
4. What are the biggest challenges that Financial Inclusion has to deal with?
Ans: Here are some of the largest challenges with financial inclusion:
- There isn’t enough support for scalability in bank services.
- There is limited uptake of technology.
- Lack of documents needed for banking activities.
- Almost minimal financial knowledge.
- Telecom connections and infrastructure aren’t very good in rural areas.
5. Why Financial Inclusion is essential?
Ans: Since many parts of the Indian economy can’t use formal banking services, Financial Inclusion was made to give them these services. With the help of Financial Inclusion, banks can now lend money to help fund projects.