An inclusive financial ecosystem is quintessential to the social contract between the state and its citizens. It surmounts both physical and, more importantly, psychological barriers, and helps achieve sustainable economic growth. It is gratifying that our policymakers are seized of this imperative and have been working along multiple avenues to address this.
CRISIL Inclusix –
- CRISIL Inclusix measures progress on financial inclusion down to the level of each of the 666 districts in the country, and is based on data provided by the RBI, the MicroFinance Institution Network, and the Insurance Information Bureau of India. It is based on four dimensions—branch penetration, deposit penetration, credit penetration and insurance penetration.
- The index’s readings for fiscal 2016 (the latest period for which data is available) show financial inclusion has improved significantly in India, with the all-India score rising to 58.0 in fiscal 2016, compared with 50.1 in fiscal 2013. The Pradhan Mantri Jan Dhan Yojana, and the RBI’s steadfast focus on unbanked regions, have really made a difference.
Reasons for progress –
- As many as 600 million deposit accounts were opened between fiscals 2013 and 2016, or twice the number between 2010 and 2013. Nearly a third of this was on account of Jan Dhana Yojana.
- On the credit side, there was a sharp 31.7 million increase in new credit or loan (banks and micro-finance) accounts in the two years up to fiscal 2016, which is the most since fiscal 2013. Notably, micro-finance institutions contributed significantly to the financially under-penetrated regions.
- The Digital India initiative, payments banks and small finance banks have all helped improve the reach of formal financial services to economically disadvantaged sections of the populace and geographically remote regions.
- Underserved pockets, particularly in the North-East and the east, have logged a sharp rise in credit penetration. The credit penetration index of these two regions is up an average 9 points compared with 6 points at the all-India level.
- Among states, Kerala was well ahead with a CRISIL Inclusix score of 90.9, while Rajasthan moved up from “below average” to “above average” and Haryana from “above average” to “high”.
Challenges remain –
- Despite the strong growth, only 200 million borrowers have had access to credit from formal channels.
- In terms of branch penetration, the number of new branches opened by lenders has declined because they are betting more on the digital channels (mobile phones/internet).
- Among regions, the south remains ahead by a wide margin, but other regions are catching up thanks to the spread of micro-finance, particularly in the east.
Way forward –
Financial inclusion can spread faster if there is sharper focus on enhancing branch and credit penetration beyond south India. Policy makers need to continue incentivising branch and credit penetration in districts with low CRISIL Inclusix scores. Coverage through protection-linked insurance and pension schemes also needs to be ratcheted up significantly.
There is still a long way to go before India reaches acceptable levels of financial inclusion, but there’s little to complain about the policy approach today. More of a good thing would serve very well here.