Financial Inclusion

In one line

Financial inclusion is the modern name for what social control and nationalisation were trying to do, and technology achieved more of it in ten years than branch expansion had in forty.

In the wording a student can write in an exam: financial inclusion means the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups who are excluded from the formal financial system; it has been pursued in India through branch expansion after nationalisation, through the no-frills or basic savings bank deposit account, through business correspondents, and most substantially through the Pradhan Mantri Jan Dhan Yojana launched in 2014, supported by Aadhaar-based identification and by direct benefit transfer.

Why exclusion persisted after everything in this module

This is the honest opening, and it is what makes the chapter more than a list of schemes.

Chapter 170 showed the branch expansion that followed nationalisation, and it was enormous. Chapter 180 showed the priority sector obligation, which directed a fixed share of credit. Chapter 190 showed three separate institutional structures built to reach the rural borrower.

And after all of it, a very large part of the population still had no bank account. Household surveys through the 2000s put the excluded share at around half of all households, higher in the east and north-east and among landless and casual workers.

The reasons were not the ones the earlier policies had addressed.

Distance was only part of it. A branch in the taluka town is not much use to a woman who loses a day's wages to reach it.

Cost was a larger part. A minimum balance requirement of a few thousand rupees excludes a household that never holds that much at one time, and account charges consume a small balance.

Documentation excluded more people than either. Know-your-customer requirements demand proof of identity and address, and a migrant worker or a landless labourer frequently had neither in an acceptable form. This is the constraint that technology eventually removed.

And the banks had no commercial reason to solve it. A savings account with an average balance of eight hundred rupees costs more to service than it earns, so a bank meeting its priority sector target on credit had no incentive to open deposit accounts for the poor.

The instruments, in order

The no-frills account, from 2005. The Reserve Bank directed banks to offer an account with nil or very low minimum balance and low charges, so that cost ceased to be a barrier. It was renamed the Basic Savings Bank Deposit Account, which carries a minimum set of free facilities: deposit and withdrawal, an ATM card, and a limited number of free withdrawals, with no requirement of minimum balance.