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CHAPTER 8
Inclusive Finance: India Through the BRICS Lens
Saibal Ghosh
Qatar Central Bank, Doha, Qatar
Introduction
In the post-crisis world, the role and relevance of finance for economic growth has gained increasing attention. The reasons for this focus are not too far to seek. Access to finance, especially to the poor, is essential for promoting inclusive economic growth and eradicating poverty. A significant body of research has identified the beneficial impact of access to financial services on all aspects of social and economic outcomes at the household, industry, and firm levels (King and Levine, 1993; Levine, 2005a, 2005b; Demirguc Kunt et al., 2008, 2017; Demirguc Kunt and Levine, 2008; Rajan and Zingales, 1998).
Notwithstanding its beneficial effects, finance does not appear to have adequately permeated vast segments of the population. To exemplify, according to the World Bank’s Global FINDEX, although 700 million adults became first-time account holders between 2011 and 2014, only 62% of adults globally had an account with a formal financial institution in 2014. The recently released global FINDEX (World Bank, 2018) finds that although account ownership had increased to 69% (3.8 billion adults) in 2017, the number of unbanked still stood at 1.7 billion (as compared with 2 billion in 2014). In the case of India, 175 million adults became been added into the fold of account holders during the period 2011–2014. Even more impressive has been the subsequent progress. In particular, of the 514 million bank accounts opened globally during 2014–2017, around 55% were from India. As a consequence, the extent of financial inclusion, which was 53% in 2014, jumped to 80% in 2017. And yet, close to 50% of the bank accounts witnessed no transactions in the past 1 year. What this suggests is a discernible gap between the availability of finance and its accessibility and use.
Both the Government and the Reserve Bank have undertaken significant steps in the recent past to improve financial access. Several strategies have been undertaken including lending to a designated sector and even earlier, selective credit controls. Banks and other smaller financial entities were given targets to open savings bank accounts and provide micro-insurance policies, respectively. The Self-Help Group-bank linkage program (SHG-BLP), Kisan (meaning, farmer) Credit Card scheme for farmers, Atal Pension Yojana (meaning, scheme), financing and refinancing of cooperative banks, regional rural banks that extend credit to rural clientele, and various state-level credit programs for provision of credit to the rural population are examples of more direct efforts.
Advancing the process forward, the Reserve Bank has granted ‘in principle’ approval to a multitude of players in the financial eco-system. At the same time, with the rapid expansion of information technology and communications networking, the need to harness technology to reach out to the vast sections of the unbanked populace, incorporating related benefits such as social security transfers, and insurance, has improved further. Other newer forms of digital technology, such as biometrics, including eye scanning and finger printing, have come to occupy an important place in the government’s financial inclusion agenda. In this context, the analysis indicates that access to mobile communications plays a key role in the financial inclusion drive.
The Pradhan Mantri Jan Dhan Yojana (literally translated as, Prime Minister’s Mass Money Scheme) of the Government launched in August 2014 marks a landmark effort in the quest for universal financial access. The scheme had set ambitious targets, such as providing access to formal finance to every household within a stipulated period of its introduction. The government is also focusing to pay benefits directly into these accounts (Pickens et al., 2009). This will also ensure that a big chunk of the accounts opened under various schemes, which were earlier dormant, witness ‘movement’, thereby integrating access with use. We analyze the impact of the scheme on the access to and use of finance by households and find that while there has been a perceptible increase in the former, the evidence regarding use is less compelling.
Issues of gender have gained currency in the backdrop of the financial inclusion debate. According to the Global Findex 2017, of the unbanked worldwide, 59% or 1 billion are women. In the Indian case, the number of female savings bank accounts per thousand of the female population was around 570 in 2016 as compared with less than half that number 5 years ago. This is consistent with research which suggests that, on average, among adults the number of females with an account at a formal financial institution is significantly lower as compared with males (Demirguc Kunt and Klapper, 2012). With
