India’s flagship financial inclusion programme — Pradhan Mantri Jan Dhan Yojana (PMJDY) — launched in 2015 with a mission to provide a basic account to every adult— has significantly changed the demographics. India is now at a tipping point, with sharply narrowing gender gaps in financial access. According to the World Bank’s Global Financial Inclusion Database, or Global Findex report (2017) 80 per cent Indian adults now have a bank account — 27 points higher than the 53 per cent estimated in Findex 2014 round. Findex 2017 estimates that 77 per cent Indian women now own a bank account against respective 43 per cent and 26 per cent in 2014 and 2011. India’s Global Findex (GFX), was 35 in 2011, 53 in 2014, and is 80 in 2017. GFX 2017 stands at 80 for China (79 in 2014), 76 for Russia, 70 for Brazil, 69 for South Africa, 96 for UK, and 93 for US.
However, while improved financial access is cause for celebration, the level of uptake and usage of accounts is still a dark spot. Around 48 per cent of the bank accounts have seen no transactions in the last one year, the World Bank says in its Global Findex database report India has the world’s highest share of inactive accounts, about twice the average of 25 per cent for developing economies.
The NABARD All India Rural Financial Inclusion Survey (NAFIS) 2016-17 says that despite having a relatively high account ownership, India claims a large share of the global unbanked population at 19 crore after China at 22.5 crore. Of the total unbanked population in China and India 60 per cent are women. Institutional saving by women was reported by only 26 per cent of the households.
According to Findex 2017, in developing economies, female account owners are, on average, five percentage points more likely than male account owners to have an inactive account. In India, however, this gender gap is about twice as large; 54 percent of women with an account made no deposit or withdrawal in a year as compared to 43 percent of men. Beyond account ownership, in terms of credit and insurance usage, the gender gap remains. High gender inequalities in access to formal credit have long manifested in India’s scarce gender-wise financial statistics. For example, distribution of outstanding credit in small borrower accounts shows 24.5 per cent share of female account owners against 72 per cent by men as on March 2017.
The Aadhaar biometric identification system and the JAM (Jan Dhan Yojana, Aadhaar and Mobile number) trinity are reshaping the financial landscape and has enabled India to surge to new heights. The take-off of digital financial services has largely driven this strong growth. It has also enabled one of the biggest pieces of reform ever attempted in India — direct subsidy transfers. Several state governments have adopted the default savings options by mandatorily delivering all wages to participants of government schemes and programmes through formal saving accounts. For instance, the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) stipulates that at least one-third of its beneficiaries should be women and their payments should be delivered via electronic transfers to bank accounts.
Financial inclusion is far broader than having an account. In essence, people want financial services to accomplish their goals and solve their fundamental problems. It is a building block for both poverty reduction and opportunities for economic growth Financial inclusion facilitates day-to-day living, and enables families and businesses plan for everything from long-term goals to unexpected emergencies.
The Centre for Financial Inclusion at ACCION, the famous international nonprofit has a very visionary five-pillar template that sums up the whole vision of effective financial inclusion: A full range of services: payments, savings, credit and insurance; provided with quality: convenience, affordability, safety and respect; to all who can use them, including highly-excluded groups; in a vibrant and competitive marketplace; comprising financially capable customers.
Its managing director, Elizabeth Rhyne, is still more succinct. “It is not just about access, but about products that people actively use and have the potential to improve their lives,” she avers.
The essence of financial inclusion is to ensure delivery of financial services which include bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, and insurance facilities (life and non-life) to those who do not otherwise have access to high street banks. But equally important is the active use of these services by consumes. Merely opening physical accounts as flag posts for a financial identity will not help unless these are actively used by people for managing their money. There is a need to shift the interventional focus from simple access-oriented measures towards utilisation and engagement-oriented measures. It is vital that we keep in mind that financial inclusion is a means to an end and not the end in and of itself. It is only when people use financial tools to make their lives better, and their communities stronger that financial inclusion will be complete.
Account-holding doesn’t automatically correlate with greater financial security. It is just a beginning. To validate progress, we need to see not only more active accounts, but also greater use of all four major types of financial services: payments, savings, credit, and insurance. Simply increasing the numbers accessing financial services and accounts won’t improve the financial health of vulnerable groups: we have to simultaneously make people cognisant of how to handle them by bringing about changes in attitudes to money and savings practices, so that people can make the most of the services available to them.
The international body, Centre for Financial Inclusion (CFI), defines financial inclusion as a state in which everyone who can use them has access to a full suite of quality services at affordable prices, delivered by a range of providers in a competitive market, with convenience, dignity and consumer protections to financially capable clients.
As access increasingly becomes a reality, a second generation of challenges emerges: to capitalise on the openings made possible through access to offer products and services that truly improve lives .We have to go beyond mere physical accounts if we want to catalyse financial inclusion into broader economic and social growth. We need access to design and develop basket of financial services. A one-time incentive for opening the account is not enough to ensure that they continue to save and use the account. A dormant account, unless it has a substantial balance, is of little value to either financial service provider or customer. Usage rates may remain low because transactions are too costly, insecure, or inconvenient.
Accounts should basically serve as stepping stones to savings or credit. Being able to have access to a transaction account is a first step toward broader financial inclusion. If there is little forward movement in them the entire efforts are a waste. What needs to be done is to make more and more of these accounts transactional, and actively so. Once the subsidy comes in, that’s an indication of the first set of transactions. But after that, what is essential, is getting the customers used to the habit of saving, getting them to use formal channels for the remittance of money and then, through the way the money comes into the account, building some kind of credit analytics and making small loans and micro-insurance available to them. Without greater and consistent usage of bank accounts, the promises of financial inclusion — equitable economic growth growing and successful businesses, and improving financial security and prosperity — will remain elusive.
What is important is getting the customers to increase the frequency of transactions, get into the habit of saving, move further to using formal channels for the remittance of money and then finally use them for niche products like insurance and pension. People who regularly use a bank account are more likely to be financially literate than those who do not as there is a direct correlation between financial knowledge and financial services. While higher financial literacy leads to broader financial inclusion, operating an account or using credit deepens consumers’ financial skills.
Meaningful financial inclusion is hard, involving a complex interplay of factors: Viable business models, regulatory models and behavioural change of new account holders. The new mantra for financial inclusion should be: Access counts but it is usage that matters.
The writer is a member of the Niti Aayog’s National Committee on Financial Literacy and Inclusion for Women
