The Reserve Bank of India (RBI) introduced the Financial Inclusion Index (FI-Index) on August 17 to gauge how many people in the country have access to banking and financial services and products and the usage and quality of such facilities.
“Financial Inclusion has been viewed as a key enabler for achieving inclusive and sustainable development worldwide,” the RBI said in a statement on April 7, 2021.
The central bank had revealed the National Strategy for Financial Inclusion: 2019-2024 on January 10, 2020, to achieve the objective of financial inclusion in a coordinated and time-bound manner.
Here’s an explainer.
What is financial inclusion?
Financial inclusion is the process of extending the reach of formal banking services and products to the unbanked population in the country. According to experts, financial inclusion goes beyond opening a bank account.
Former RBI deputy governor SS Mundra, in a speech on September 24, 2016, defined financial inclusion as “the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low-income groups in particular at an affordable cost in a fair and transparent manner by mainstream institutional players.”
According to Abhishek Sinha, cofounder of Eko India Financial Services, the key to financial inclusion lies in understanding the earning cycles of people and how financial products can fill the gaps. Loans, insurance and savings should be used so that people can maintain their lifestyles and deal with unexpected events such as disruptions in personal health and businesses, Sinha said.
What has been done to push financial inclusion?
Financial inclusion has been a priority for decades for the regulator and successive governments – from the nationalisation of banks in 1969 and 1980 to the laying down of priority sector requirements and the lead bank scheme to the introduction of regional rural banks. The central bank adopted a structured approach after 2005 with the framework of the banking correspondent model.
Shweta Aprameya, founder of ARTH, a digital finance company that provides credit and financial services to rural micro-entrepreneurs, said the regulator has framed several guidelines for the banking correspondent model, issuance of pre-paid instruments and small finance banks to deepen the availability of financial services and it is a good time to measure the progress made.
In January 2014, the Central government introduced Pradhan Mantri Jan Dhan Yojana (PMJDY), where no-frills accounts were opened for the unbanked segment of people.
In May 2015, the Central government launched two insurance schemes – Pradhan Mantri Suraksha Bima Yojana (PMSBY), which provides accidental death cover of Rs 2 lakh for the 18-70 age group, and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), a policy providing life cover of Rs 2 lakh for those aged 18 to 50.
What’s the progress so far?
Under PMJDY, more than 430 million accounts have been opened with deposits totalling Rs 1,46,230 crore and over 312 million RuPay payment cards have been issued.
Bank account penetration is at an all-time high and accounts have been opened in the names of both men and women in a household, which in itself is a big achievement, said Puneet Gupta, cofounder of Kaleidofin, a platform that offers personalised financial solutions for underserved customers.
As of May 26, 2021, about 103 million people had enrolled for PMJJBY and 234 million people had signed up for PMSBY.
What is the Financial Inclusion Index?
The RBI conceptualised and constructed the FI-Index as a comprehensive measure that incorporates details of banking, investments, insurance, postal as well as the pension sector in consultation with the government and regulators.
The index helps to determine and assess the extent of financial inclusion in India. It captures information on various aspects of financial inclusion on a scale from 0 to 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.
Gupta said it would be good to assess financial inclusion at the individual and country levels. He said a 100 on this score would mean that all customers are fully aware of all kinds of financial services, have access to all products and do not feel constrained to make transactions.
What are the parameters of the FI-Index?
There are three broad parameters with certain assigned weights – access (35 percent), usage (45 percent) and quality (20 percent). Each parameter consists of various dimensions computed based on 97 indicators.
What is the meaning of access in financial inclusion?
According to the central bank, this means access to bank branches, number of ATMs, banking correspondents and point-of-sales terminals per 1 lakh adults.
Aprameya of ARTH said access is a multi-dimensional aspect. Access will have to be where servicing is also a metric – a banker needs to give the customer a point of presence and service.
She explained that even if an access point is provided, it’s important to measure who all can actually use it. Some groups of people are more excluded than others – the elderly, differently abled, women and transgenders. While product innovation, technology and solution are enablers, ‘equality in financial inclusion’ should also be an important measure, Apremya said.
What is the first reading of the FI-Index?
The FI-Index doesn’t have a base year. The FI-Index for the year ended March 2021 is 53.9 as against 43.4 for the year ended March 2017. The index will be published every July.
What are the challenges in achieving financial inclusion?
Experts said that to push for complete financial inclusion, constraints must be removed on the supply side (financial institutions) and the demand side (target segment).
“Familiarity and awareness of financial products are missing for a large proportion of households who in turn end up giving financial services a complete pass,” Gupta said. “Rather than focus on financial services, the idea should be to focus on goals and to make customers aware about how to make the best use of financial services to meet their goals and not lose out due to their lack of awareness.”