India’s Integrated and Innovative Approach to Financial Inclusion

19 Jan 2018

India has approached the goal of progressing towards universal financial inclusion, designed to provide wider access, increased usage of financial services, improve quality of financial architecture and regulatory environment, and making positive impact on household welfare, in an integrated and innovative manner.

India has laid solid foundations for sustaining financial inclusion initiatives through implementation of JAM, which stands for Jan Dhan Yojana – a national identity card called Aadhar –and mobile technology.

The Pradhan Mantri Jan Dhan Yojana (PMJDY), initiated in 2014, has enabled substantial proportion of India’s households to open a bank account, without the need to maintain a minimum balance. It also extends to other financial services, such as provision of a debit card (called RUPAY), with accident insurance cover; and an overdraft facility.

The number of bank accounts under PMJDY has increased remarkably from 54 million in September 2014 to around 300 million by September 2017. More importantly, the balances in these accounts have been steadily increasing, from INR 42 billion in September 2014 to INR 667 billion in September 2017, with an average balance of non-zero accounts (around 25 percent of the total in February 2017) being INR 3100. As more benefit payments related to government programs, both at the Union and State government levels are directly transferred to these bank accounts, the activity in these accounts can be expected to increase. This augurs well for formation of banking habits in India’s population, a key requirement for greater access and usage.

The UIDAI (Unique Identification Authority of India) administers unique biometric identification card called ‘Aadhar’, which covers around 90 percent of the population. It is an essential component of India’s approach to financial inclusion as it facilitates delivery of financial subsidies, benefits and transfers with greater efficiency and fewer leakages.

In addition to PMJDY and Aadhar, there has been increasing emphasis on the use of mobile phones. The government has used the unified payments interface (UPI) to make person-to -person and e-commerce transactions easier through various applications such as BHIM (Bharat Interface for Money). Prepaid payment instruments are closely related to this, and greater regulatory clarity for the payments sector could facilitate the broader objective of financial inclusion.

Some of the other India context specific schemes for financial inclusion include Atal Pension Yojna (APY), a contributory scheme with commensurate guaranteed benefits; Pradhan Mantri Surakasha Bima Yojna (PMFBY) for health insurance; Pradhan Mantri Jeevan Jyoti Bima Yojna (PMJJBY) for life insurance; and Pradhan Mantri Fasal Bima Yojna (PMFBY) for crop insurance. These schemes will help provide pension and insurance services to many households who will not otherwise have access to them.

The design and implementation of these schemes, particularly sound actuarial practices required for insurance mechanisms and for tracking of future premiums and government contingent fiscal liabilities, will however need to be given greater focus to sustain them.

Access to credit is an integral part of financial inclusion. MUDRA (Micro Units Development and Refinance) Agency Bank set up in 2015, is designed to finance micro-units and refinance eligible financial institutions to encourage entrepreneurship, and business in the country. In 2017-18 alone, 21.5 million loans, amounting to INR 105.2 billion (around INR 49,000 per loan) were approved. It fills a critical need for financial inclusion. The challenge for MUDRA Bank would be to nurture micro units financed to move up the value-added chain and enhance the productivity of resources used by them.

In 2017, India Post Payment Bank (IPPB) was set up as a Public Limited Company under India’s department of Post with an independent Board of Directors. It aims to substantially enhance access to financial services to those who currently have relatively limited access to banking services. The IPPB will also assist in direct benefit transfer of various government benefits, including subsidies. A strong technology platform is being set up for such transfers. The IPPB thus, integrates well with the PMJDY.

The initial results are encouraging, but three additional challenges will need to be addressed.

First, sustained political commitment to the current approach to financial inclusion will be needed.

Second, the financial inclusion initiatives would need to keep pace with the rapidly changing technology of delivering financial services. This would require that the gap between the supply of digital and technological infrastructure and managing the demand for financial services be given requisite consideration.

Third, given India’s diversity, research and data analytics capabilities need to be developed for more empirical evidence based approaches, with feedback loop into policymaking.

This article was published in Governance Now Financial Inclusion Casebook.

Mukul Asher

Professorial Fellow