Financial Inclusion

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Contents
1.0 Financial Inclusion .......................................................................................................2
1.1 What is Financial Inclusion? ................................................................................................ 2
1.2 Objectives of Financial Inclusion ......................................................................................... 2
1.3 History of Financial Inclusion in India .................................................................................. 3
1.3.1 Bank Nationalization..............................................................................................................................3
1.3.2 Lead Bank Scheme .................................................................................................................................3
1.3.3 Priority Sector Lending Guidelines ........................................................................................................4
1.3.4 Regional Rural Banks (RRBs) ..................................................................................................................4
1.3.5 NABARD .................................................................................................................................................4
1.3.6 Local Area Banks and Self-Help Groups.................................................................................................4
1.3.7 Business Correspondents ......................................................................................................................5
1.4 Twin Aspects of Financial Inclusion ..................................................................................... 5
1.4.1 Demand Side – Financial Literacy ..........................................................................................................6
1.4.2 Supply Side – Financial Inclusion ...........................................................................................................6
1.5 Financial Inclusion Vs. Microfinance .................................................................................... 7
1.5.1 What is Microfinance? ...........................................................................................................................7
1.5.2 How is Microfinance Different from Financial Inclusion? .....................................................................7
1.6 RBI Initiatives for Financial Inclusion ................................................................................... 8
1.6.1 No Frills Accounts ..................................................................................................................................8
1.6.2 Pradhan Mantri Jan Dhan Yojana (PMJDY)............................................................................................9
1.6.3 MUDRA ..................................................................................................................................................9
1.6.4 Direct Benefit Transfer ........................................................................................................................10
1.6.5 Kisan Credit Card .................................................................................................................................11
1.6.6 Financial Literacy Centres (FLCs)/ Rural Self Employment Training Institutes (RSETIs) ......................11
1.6.7 Financial Inclusion Plans (FIPs) ............................................................................................................12
1.6.8 Mobile Banking, ATMs, Debit and Credit Card, RuPay, & e-wallets....................................................12
1.6.9 UPI........................................................................................................................................................12
1.6.10 USSD ..................................................................................................................................................13
1.7 National Strategy for Financial Inclusion 2019-2024........................................................... 13
1.7.1 What is NSFI? .......................................................................................................................................13
1.7.2 Objective of NSFI .................................................................................................................................14
1.7.3 Strategic Pillars of NSFI ........................................................................................................................14

2.0 Financial Literacy ......................................................................................................16

2.1 RBI Initiatives for Financial Literacy ........................................................................................................16
2.2 Financial Inclusion Index .........................................................................................................................16

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1.0 Financial Inclusion

1.1 What is Financial Inclusion?

• Financial Inclusion may be defined as the process of ensuring access to

financial services, and timely and adequate credit to individuals and businesses
at an affordable cost.
• Financial inclusion chiefly focuses on providing reliable financial solutions to the
economically underprivileged sections of the society.
• It also helps in mitigating the exploitation of vulnerable sections by usurious
money lenders, by providing easy access to formal credit.
• Financial inclusion broadens the resource base of the financial system by
developing a culture of savings among large segment of rural population and
plays its own role in the process of economic development.
• It ensures sustainable and inclusive growth by passing on the benefits of
economic growth to the poor and excluded sections of the society.

1.2 Objectives of Financial Inclusion

• Financial inclusion intends to help people secure financial services and

products at economical prices.
• It aims to establish proper financial institutions to cater to the needs of the
poor people.
• It helps maintain financial sustainability so that the less fortunate people have
a certainty of funds which they struggle to have.

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• To provide financial assistance by setting up numerous institutions so that

there is sufficient competition so that clients have a lot of options to choose
from.
• Financial inclusion intends to improve financial literacy and financial
awareness in the nation specially among economically underprivileged
sections of the society.
• Help in growth and development by encouraging the habit to save, thus
enhancing capital formation in the country and giving it an economic boost.
• Also, the availability of sufficient and transparent credit from formal banking
institutions will promote the entrepreneurial spirit among the people that
ensures increase in productivity and prosperity in rural areas.

1.3 History of Financial Inclusion in India

History of Financial Inclusion in India – Important Milestones

1969 & Nationalization of Banks
1980
1969 Lead Bank Scheme launched
1972 Priority Sector Lending (PSL) guidelines were issued
1975 Establishment of Regional Rural Banks (RRBs)
1982 Establishment of National Bank for Agriculture and Rural Development
(NABARD)
1990s Establishment of Local Area Banks (LABs) and Self-Help Groups
(SHGs)
2006 Introduction of Business Correspondents

1.3.1 Bank Nationalization

• The thrust towards inclusive growth of banking can be traced to the first phase
of bank nationalization in 1969, and subsequently in 1980.
• Bank nationalization was undertaken to push funds towards sectors such as
agriculture and small industries, to encourage new entrepreneurs, and to
develop all backward areas.

1.3.2 Lead Bank Scheme

• There was a need to evolve plans and programmes for the development of an
adequate banking and credit structure in the rural areas.
• Thus, to ensure that banks concentrate on certain districts where they act as a
‘Lead Banks’ in order to enable the Public Sector Banks to discharge their social
responsibilities, the Reserve Bank of India introduced the Lead Bank Scheme
in December 1969, based on the objective of enhancing the flow of bank
finance to the priority sector.

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1.3.3 Priority Sector Lending Guidelines

• Priority Sector Lending (PSL) guidelines were issued to ensure that adequate
institutional credit flows into some of the vulnerable sectors of the economy,
which may not be attractive for banks from the point of view of profitability.
• The major categories under priority sector are as follows:
▪ Agriculture
▪ Micro, Small and Medium Enterprises (MSMEs)
▪ Export Credit
▪ Education
▪ Housing
▪ Social Infrastructure
▪ Renewable Energy
▪ Others

1.3.4 Regional Rural Banks (RRBs)

• By 1975, there was a focus on building a new infrastructure at the grassroots

level for rural banking
• This led to the establishment of Regional Rural Banks (RRBs).
• RRBs were set up to provide sufficient banking and credit facility for agriculture
and other rural sectors.
• RRBs are a mix of ideology of commercial and cooperative banks. They are
profit oriented like commercial banks and community oriented like cooperatives.

1.3.5 NABARD

• The National Bank for Agriculture and Rural Development (NABARD) was
established in the year 1982 as the Development Bank of the Nation for
Fostering Rural Prosperity.
• The Bank aimed at providing agricultural and rural credit.

1.3.6 Local Area Banks and Self-Help Groups

• Local Area Banks were set up to mobilize the rural savings by local institutions
and make them available for investments in the local areas.

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• These banks were expected to bridge the gaps in credit availability and
strengthen the institutional credit framework in the rural and semi-urban areas.
• The concept of self-help groups was developed to help organize the rural poor
to meet their productive and consumption needs out of their saving in case of
the absence of availability of institutional credit.

1.3.7 Business Correspondents

• RBI, in 2006, permitted banks to use intermediaries such as Business

Facilitators (BF) or Business Correspondents (BC) for providing financial and
banking services to ensure greater financial inclusion and increasing outreach
of the banking sector.
• BCs are allowed to conduct banking business as agents of banks at places
other than the bank premises.
• Their scope of activities may include identification of borrowers, collection and
processing of loan applications including verification of primary
information/data, creating awareness, debt counselling, monitoring of Self-Help
Groups, etc.

1.4 Twin Aspects of Inclusive Financial Growth

• Financial Inclusion and Financial Literacy are considered the twin pillars of
inclusive financial growth.
• While Financial Inclusion acts on the supply side, i.e., for creating access,
Financial Literacy acts from the demand side i.e., creating a demand for the
financial products and services.

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1.4.1 Demand Side – Financial Literacy

• Financial Literacy & Credit Counselling – Better financial awareness results

in more demand for financial products.
• Credit Absorption Capacity – As credit capacity of individual increases, credit
demand increases simultaneously.
• Knowledge of Products – Better knowledge of various financial products
means higher demand for the same.

1.4.2 Supply Side – Financial Inclusion

• Financial Markets – Existence of sound financial markets results in more

supply of financial products.
• Banks – Easy access to banks means more supply of financial products.
• Appropriate Design of Products & Services – Financial products and
services must be designed in a way that they meet the needs of the intended
consumers.

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1.5 Financial Inclusion Vs. Microfinance

1.5.1 What is Microfinance?

• Microfinance refers to the financial services provided to low-income individuals

or groups who are typically excluded from traditional banking.
• Most microfinance institutions focus on offering credit in the form of small
working capital loans, sometimes called microloans or microcredit.
• Microfinance aims to improve financial services access for marginalized
groups, especially women and the rural poor, to promote self-sufficiency.
• Microfinance seeks to address the needs of the unbanked by fostering
economic justice and financial inclusion for all.

1.5.2 How is Microfinance Different from Financial Inclusion?

Microfinance Financial Inclusion

Microfinance seeks to ensure that the Financial inclusion seeks to ensure
use of those tools leads to positive that everyone has access to useful
benefits for those living in poverty. financial tools.
Microfinance encompasses a limited Financial inclusion has a wider
range of players and institutions. meaning, and it encompasses a wider
range of players and institutions.
Microfinance advocates generally work Financial inclusion advocates more
with the microfinance institutions that often work with a broad range of
primarily serve the economically weaker providers to achieve their goals,
sections of the society. including those that do not necessarily
focus exclusively on poor people.

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1.6 RBI Initiatives for Financial Inclusion

Financial Inclusion

New Digital
Schemes Products / Services
Technologies

No Frills A/c Kisan Credit

Card Mobile Banking, ATMs,
UPI,Debit and Credit Card,
PMJDY RuPay, e-wallets, USSD, etc.
BCs

MUDRA
FLCs and RSETIs

Direct Benefit
Transfer FIPs

1.6.1 No Frills Accounts

• The RBI had introduced 'no-frills' accounts in 2005 to provide basic banking
facilities to poor and promote financial inclusion.
• These 'no-frills' accounts were introduced with 'nil' or very low minimum balance
as well as charges that would make such accounts accessible to vast sections
of population.
• In 2012, RBI asked banks to convert the existing No Frills accounts to Basic
Savings Bank Deposit Account (BSBDA), providing the following minimum
common facilities to all their customers:
▪ The ‘Basic Savings Bank Deposit Account’ should be considered a
normal banking service available to all.
▪ This account shall not have the requirement of any minimum balance.
▪ The services available in the account will include deposit and withdrawal
of cash at bank branch as well as ATMs; receipt/credit of money through
electronic payment channels or by means of deposit/collection of
cheques drawn by Central/State Government agencies and
departments.
▪ While there will be no limit on the number of deposits that can be made
in a month, account holders will be allowed a maximum of four
withdrawals in a month, including ATM withdrawals.
▪ Facility of ATM card or ATM-cum-Debit Card.

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1.6.2 Pradhan Mantri Jan Dhan Yojana (PMJDY)

• PMJDY, under the National Mission for Financial Inclusion, was launched in
August 2014.
• It envisages universal access to banking facilities with at least one basic
banking account for every household, financial literacy, access to credit,
insurance and pension.
• Accounts opened under PMJDY are being opened with Zero balance. However,
if the account-holder wishes to get cheque book, he/she will have to fulfil
minimum balance criteria.
• Special Benefits under PMJDY scheme:
▪ Interest on deposit.
▪ Accidental insurance cover of Rs. 2 lakhs
▪ No minimum balance required.
▪ The scheme provides life cover of Rs. 30,000/- payable on death of the
beneficiary, subject to fulfilment of the eligibility condition.
▪ Easy Transfer of money across India
▪ Beneficiaries of Government Schemes will get Direct Benefit Transfer in
these accounts.
▪ After satisfactory operation of the account for 6 months, an overdraft
facility will be permitted
▪ Access to pension, insurance products, etc.

1.6.3 MUDRA

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• The Micro Units Development & Refinance Agency Ltd (MUDRA) was set
up by the Government of India in 2015 to provide loans at low rates to
microfinance institutions and non-banking financial institutions which then
provide credit to MSMEs.
• MUDRA was initially formed as a wholly owned subsidiary of Small Industries
Development bank of India (SIDBI), with 100% capital being contributed by it.
• MUDRA would partner with Banks, Microfinance Institutions and other lending
institutions at state level / regional level to provide micro finance support to the
micro enterprise sector in the country.

1.6.4 Direct Benefit Transfer

• Direct Benefit Transfer (DBT) is an attempt to change the mechanism of

transferring subsidies launched by Government of India on 1 January 2013.
• This scheme or program aims to establish a Giro system to transfer subsidies
directly to the people through their linked bank accounts. (Giro is a payment
transfer from one bank account to another bank account and initiated by the
payer, not the payee.)
• It is hoped that crediting subsidies into bank accounts will reduce leakages,
duplicity and delay and will increase transparency and accountability.
• If entitlements under various state sponsored schemes start flowing directly into
the bank accounts of individuals under DBT mode, it can act as a catalyst to

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encourage saving habit leading to build up of investment and seed capital for
availing productive credit.

1.6.5 Kisan Credit Card

• The Kisan Credit Card (KCC) scheme is a Government of India scheme which
provides farmers with timely access to credit.
• The KCC scheme was launched in 1998 with the aim of providing short-term
formal credit to farmers.
• KCC has emerged as an innovative credit delivery mechanism to provide
adequate and timely bank credit to farmers under a single window for their
cultivation and other needs, including consumption, investment and
insurance.
• The KCC Scheme has now been extended to farmers involved in animal
husbandry and fishery to enable them to meet their working capital
requirements.

1.6.6 Financial Literacy Centres (FLCs)/ Rural Self Employment Training

Institutes (RSETIs)

• Banks in India have been mandated to set up Financial Literacy Centres (FLCs)
for extending financial literacy.
• Tailored camps are conducted for five different target groups, i.e., farmers,
small entrepreneurs, SHGs, school students and senior citizens.
• The Rural Self Employment Training Institutes (RSETIs) have been set up by
various banks all over the country at the district level.
• The key objective of an RSETI is “short term training and long-term hand
holding with assistance to credit linkage for trainees”.

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1.6.7 Financial Inclusion Plans (FIPs)

• In order to have a planned and structured approach to financial inclusion, banks

have been advised to prepare Board-approved Financial Inclusion Plans
(FIPs).
• These FIPs capture banks’ achievements on parameters such as:
▪ the number of outlets (branches and BCs),
▪ Basic Savings Bank Deposit Accounts (BSBDAs),
▪ overdraft facilities availed in those accounts,
▪ transactions in Kisan Credit Cards (KCCs) and General Credit Card
(GCC) accounts, and
▪ transactions through the Business Correspondent-Information and
Communication Technology (BC-ICT) channel.

1.6.8 Mobile Banking, ATMs, Debit and Credit Card, RuPay, & e-wallets

• India has witnessed massive progress in digital banking.

• The inventions of new innovative technologies have drastically changed the
traditional banking systems in India.
• The Indian banking has seen a massive progress and we have shifted from a
traditional cash driven economy to a cashless economy by adopting e banking
and e-commerce.
• The branch-less banking service has allowed people to obtain banking services
anywhere and anytime in an easy manner and at an affordable cost.
• Most of the banks in India have opened their own mobile apps to provide the
banking services to the customers.
• Mobile banking has increased the banking habits of the people and has also
speeded up the financial transaction process.
• Other than Mobile/internet banking, there are several other technological
innovations such as ATMs, the use of debit and credit cards, e-wallets, etc.

1.6.9 UPI

• Unified Payments Interface (or UPI) is an immediate real-time payment system

developed by National Payments Corporation of India (NPCI).
• UPI enables instant transfer of funds between two bank accounts through a
mobile platform at any time.
• It allows Instant transfer of funds through Immediate Payment Service (IMPS)
which is faster than NEFT.

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• It can be used 365 days, 24X7 and it uses virtual payment address (VPA) which
is a unique ID given by banks eliminates the need to remember details like
account number, IFSC codes, etc.
• It is a secure platform as it is based on 2-factor authentication.
• Services offered under UPI:
▪ Balance enquiry
▪ Transaction history
▪ Send/pay money
▪ Collect money
▪ Add bank account
▪ Manage account, etc.

1.6.10 USSD

• The innovative payment service works on the Unstructured Supplementary

Service Data (USSD) channel.
• This service allows mobile banking transactions using basic feature mobile
phone.
• There is no need to have mobile internet data facility for using USSD based
mobile banking.
• It is envisioned to provide financial deepening and inclusion of underbanked
society in the mainstream banking services.
• The USSD service has been launched to take the banking services to every
common man across the country.
• Banking customers can avail this service by dialling *99#, a “common number
across all Telecom Service Providers (TSPs)” on their mobile phone and
transact through an interactive menu displayed on the mobile screen.
• Key services offered under *99# service include, interbank account to account
fund transfer, balance enquiry, mini statement, etc.

1.7 National Strategy for Financial Inclusion 2019-2024

1.7.1 What is NSFI?

• The RBI launched the National Strategy for Financial Inclusion (NSFI) 2019-
2024, which sets forth the vision and key objectives of the financial inclusion
policies in India to help expand and sustain the financial inclusion process at
the national level.

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• NSFI 2019-2024 has been prepared by RBI under the aegis of the Financial
Inclusion Advisory Committee and is based on the inputs and suggestions from
Government of India, other Financial Sector Regulators viz., Securities
Exchange Board of India (SEBI), Insurance Regulatory and Development
Authority of India (IRDAI), and Pension Fund Regulatory and Development
Authority of India (PFRDA).

1.7.2 Objective of NSFI

The main objective of the NSFI is to make financial services available, accessible, and
affordable to all the citizens in a safe and transparent manner to support inclusive and
resilient multi-stakeholder led growth.

1.7.3 Strategic Pillars of NSFI

1. Universal Access to Financial Services:

• Providing Universal Access to Financial Services by expanding the outreach is
the key foundation for a successful financial inclusion strategy.
• Every village to have access to a formal financial service provider within a
reasonable distance of 5 KM radius.

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• The customers may be on boarded through an easy and hassle-free digital

process and processes should be geared towards a less-paper ecosystem.

2. Providing Basic Bouquet of Financial Services:

• The National Mission for Financial Inclusion, namely the PMJDY has created
the requisite infrastructure for providing every adult with access to a basic
bouquet of financial services.
• Every adult who is willing and eligible needs to be provided with a basic bouquet
of financial services that include a Basic Savings Bank Deposit Account, credit,
a micro life and non-life insurance product, a pension product and a suitable
investment product.

3. Access to Livelihood and Skill Development:

• Globally, it is found that sustainable livelihood generation can bring people out
from the clutches of poverty.
• Through adequate coordinated and collaborative effort between the banks,
Government and Skill Development Agencies, new entrants to financial sector
may be provided requisite information on the ongoing skill development
programmes and livelihood missions of the Government.

4. Financial Literacy and Education:

• On account of the financial inclusion efforts made by Government of India, RBI
and other stakeholders, there has been considerable progress in increasing the
number of banking outlets and bank accounts.
• Financial Literacy is an important component to enable customers to use their
accounts to their advantage and thereby enhance their financial well-being.

5. Customer Protection and Grievance Redressal:

• With a large number of new customers included in the ambit of formal financial
services, and with the emerging risks from digital financial services due to the
incidents of cloning, hacking, phishing, etc.
• Customers shall be made aware of the recourses available for resolution of
their grievances.

6. Effective Co-ordination:
• India has come a long way in the advancement of financial inclusion and the
role of effective co-ordination cannot be over emphasised.
• Over the years, financial inclusion has moved from a bank led model to a multi-
stakeholder led approach with the role of Telecom Service Providers and Fin-
Tech companies emerging as important stakeholders in the pursuit of inclusive
growth.

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2.0 Financial Literacy

• Financial Literacy is important to enable consumers of financial services to

make informed choices and thereby enhance their financial well-being.
• Recognizing this, the Technical Group on Financial Inclusion and Financial
Literacy (TGFIFL) was set up to co-ordinate the efforts on financial inclusion
and literacy at the policy level.
• The group is chaired by the Deputy Governor of the Reserve Bank of India and
has representatives from all regulators and the Finance Ministry who come up
with various policies to strengthen Financial Literacy in the country.

2.1 RBI Initiatives for Financial Literacy

Some initiatives that have been undertaken by RBI are as under:

• Instructions have been issued to banks to open and operationalize Financial

Literacy Centres (FLCs) and also undertake financial education through the
rural bank branches across the country.
• Financial Support for the same is also made available from the Financial
Inclusion Fund managed by NABARD.
• Financial Education outreach through the Regional Offices of RBI.
• Creation of financial education literature which has been uploaded on the
Financial Education website of RBI. The content is available in 13 languages
which can be downloaded by banks and other stakeholders to create
awareness about financial products and services.
• Urging Ministry of Human Resources Development, Government of India and
various State Government’s Education Departments to integrate financial
education in school curriculum.
• Mass Media awareness of matters related to Financial Literacy in co-ordination
with Department of Communication.
• Observing Financial Literacy Week (FLW) every year since 2016 to propagate
financial education messages.
• In addition to the above, the RBI is a full member of the Organisation for
Economic Co-operation and Development International Network on Financial
Education (OECD-INFE), which is a global forum to bring together policy
makers from across the globe to guide on strengthening financial education.

2.2 Financial Inclusion Index

• RBI’s financial inclusion index measures the ease of access, affordability and
availability of various financial products and services by individuals as well as
businesses.

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• Essentially, it tracks how well the financial services have been extended to the
unbanked population of the country.
• It comprises three broad parameters (weights indicated in brackets) viz., Access
(35%), Usage (45%), and Quality (20%) with each of these consisting of various
dimensions, which are computed based on a number of indicators.
• The index is responsive to ease of access, availability and usage of services, and
quality of services for all 97 indicators.
• The index covers banking, investment, insurance, postal and pension sectors,
tracking their delivery and usage amongst the population.
• The index tracks whether the government is able to deliver financial products
equally amongst the population and how usable those products are.
• It was developed by the RBI in 2021, without any ‘base year', and is published in
July every year.
• It enables fulfilment of G 20 Financial Inclusion indicators requirements.
• The G20 indicators assess the state of financial inclusion and digital financial
services, nationally and globally.

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