Theoretical Economics Letters, 2018, 8, 1935-1942

http://www.scirp.org/journal/tel
ISSN Online: 2162-2086
ISSN Print: 2162-2078

Financial Inclusion: Opportunities, Issues and

Challenges

George Varghese, Lakshmi Viswanathan

Institute for Financial Management and Research (IFMR), Sri City, Chittoor (Dist), India

How to cite this paper: Varghese, G. and Abstract

Viswanathan, L. (2018) Financial Inclusion:
Opportunities, Issues and Challenges. Theo- An all-inclusive financial system is essential for a nation as it augments effi-
retical Economics Letters, 8, 1935-1942. ciency and welfare by providing scope for secure and safe saving practices and
https://doi.org/10.4236/tel.2018.811126
by facilitating a wide range of improved financial services. The focus of the
Received: April 11, 2018 present study is on identifying the opportunities, issues, and challenges of fi-
Accepted: July 20, 2018 nancial inclusion in India.
Published: July 23, 2018
Keywords
Copyright © 2018 by authors and
Scientific Research Publishing Inc. Financial Inclusion, Financial Exclusion, Financial Services, Financial
This work is licensed under the Creative Literacy, Poverty
Commons Attribution International
License (CC BY 4.0).
http://creativecommons.org/licenses/by/4.0/
Open Access
1. Introduction
Financial inclusion is a fundamental keystone of socio-economic development.
It has been a policy goal of high priority in India for decades. It is an important
policy option which aims at reducing poverty and minimizing social as well as
financial exclusion, thereby enhancing the inclusive growth process. Though
there has been considerable progress in the process of inclusion over the past few
years, India remains along way from attaining universal financial inclusion.
The term financial inclusion is defined as the process of ensuring timely ac-
cess to financial services and adequate credit where needed by vulnerable groups
such as the weaker sections and low-income groups at an affordable cost [1].
However, it is perceived differently under different contexts. It can be viewed as
a process of enabling access to credit, improving banking services or as a process
of developing social and economic infrastructure available to the public. In
short, financial inclusion is not only about money and savings but about directly
eradicating the state of social exclusion existing in the economy.
The Government of India and the central bank have been focussing on finan-

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G. Varghese, L. Viswanathan

cial inclusion through increasing financial literacy among the under privileged
and by strengthening credit delivery mechanisms to targeted sections. To this
end, the increase in financial literacy has not only increased the number of bank
accounts, but also significantly reduced the account dormancy. Further, financial
inclusion penetrated significantly into India’s traditionally marginalized com-
munities, reducing the gaps between rural and urban, below and above poverty
populations and between men and women. Their concerted efforts over the last
five decades include nationalization of banks, the creation of well-knit branch
network of scheduled commercial banks, co-operatives and regional rural banks,
promotion of priority sector lending, the introduction of lead bank scheme, the
formation of self-help groups and provision of zero balance BSBD accounts.
The Pradhan Mantri Jan-DhanYojana (PMJDY), a people’s welfare scheme
launched by Prime Minister Narendra Modi in 2014 has a decisive impact on
India’s stride in achieving financial inclusion over the last few years and has
been extremely effective in bringing the socially excluded within the preview of
the banking system. The program is an initiative to ensure that at least one reg-
istered bank account was available for every household nationwide. The FII sur-
veys show a steady increase in the number of adults registered bank accounts
post the launch of PMJDY in August 2014. An 18 percent increase in the per-
centage of population with a registered bank account for the period between 2013
and 2015 demonstrates the success of the program in backing an all-inclusive
economic growth. Going forward, the success of financial inclusion greatly de-
pends on expanding the scope of PMJDY to include all individuals in the popu-
lation (above certain age) rather than only one account per household.
Given the size and diverse nature of the financially excluded population in In-
dia, the responsibility of accelerating inclusive growth lies equally on each
stakeholder: the government, private and public banks and the social sector. The
process of inclusive growth is not free of issues and challenges. But it also opens
new windows of opportunities for socio-economic development. The rest of the
chapter is organized into 4 sections. Section II is about the opportunities for de-
velopment. Section III describes issues and challenges related to the process of
financial inclusion. Section IV suggests some ways to improve the process of in-
clusive growth and Section V consists of concluding remarks.

2. Opportunities
Financial inclusion provides a unique opportunity to construct a sustainable fi-
nancial system. The opportunities for the government as well the financial ser-
vice providers are plenty. It accelerates growth in the real sector and triggers
overall economic development.
To begin with, the micro-insurance could be an important mechanism for
mitigating risk. If the regulators are able to induce trust regarding the product
and reduce liquidity constraints, this could help the rural population to ease
their vulnerability to risk [2]. The micro-finance institutions and self-help group

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 G. Varghese, L. Viswanathan

movements improved credit availability in rural areas. As a result, there is an in-

crease in agricultural productivity and other rural activities that generate in-
come. The increase in income leads to higher consumption, higher saving and
higher investment. The poverty levels are declining and are bound to decline
further if this trend continues [3]. The reduced poverty level will accelerate the
rate of integration with the formal banking system. Access to finance will further
attract global market players thereby increasing business and employment op-
portunities.
The introduction of remittance corridors for the migrant population is an
enormous opportunity for the migrants from rural areas, to exercise easy and
cheap remittance facilities. As of now, migrants are not adequately covered and
are facing difficulties in opening bank accounts. Further, it opens an opportunity
for the unbanked/underserved community to raise their levels of financial liter-
acy and bring about a greater awareness about their rights. Financial inclusion in
a holistic sense provides not only safe savings but also offer many other allied
services like insurance cover, entrepreneurial loans, payments and settlement fa-
cilities etc.
There are plenty of opportunities for financial institutions as well. Though the
Indian banking credit relished a significant growth since 2003, credit penetration
is still below global benchmark. By aiding the inclusive growth process, banks
and other financial institutions have greater scope to widen their customer base
and improve their performance. A large resource base can help reduce the
transaction cost, thereby improving the overall efficiency of the system. Further,
with the help of simpler KYC norms and UID, banking process can become eas-
ier, which will then help to reduce the cash and non-cash costs. Banks and other
financial institutions can achieve low-cost solutions also by partnering with
non-industry organizations and NGOs to perform certain functions. Given their
deeper understanding of the local communities, the risk of default can be re-
duced by integrating with them.
Banks need to introduce low-cost, customer-oriented innovative products to
turn the process of financial inclusion to the next big business opportunity. It
is an opportunity for private sector banks to expand their base to the rural ar-
eas. A strategic expansion in technology can be of advantage as it enables easier
and accurate banking process. For instance, mobile money reduces households’
transaction costs and improves their ability to share risk [4]. In rural India, there
were 323.27 million mobile subscribers as of March 2012 [5]. To explore such
opportunities, RBI has constituted a committee headed by B. Sambamurthy to
explore the options including the feasibility of using encrypted SMS-based funds
transfer.
The combination of IT and IT-enabled services have emerged as a sustainable
solution for greater financial inclusion. This will minimize the need for setting
up physical branches at all locations. It allows the servicing banks to improve ef-
ficiency and provides for use of multiple channels to work together as an inte-

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G. Varghese, L. Viswanathan

grated system. Banks have to make effective use of information and communica-
tion technology (ICT) to provide door step delivery of financial services. Ena-
bling more technologically trained banking correspondents for doorstep banking
in rural areas will enhance the confidence of consumers and make the process
convenient. An improved version of the BC the model will definitely help as the
older model has a success story to tell (Figure 1). Banking on the reliability and
efficiency of trained business correspondents, the number of BC’s employed by
the banks nationwide has increased 78 percent in just three years (2010 through
2013).
It is wise to tie up with telecommunication companies to deliver financial,
health and other development services as the technology has the potential to ad-
dress the issues of outreach and credit delivery in rural areas. Financial inclusion
provides opportunities to the banking sector to cut across various layers’ of peo-
ple, regions, gender, and income and encourage the public to inculcate banking
habit.

3. Issues and Challenges

On addressing the issues related to financial inclusion, it is extremely important
to take a holistic approach addressing both supply and demand-side factors. The
large size of the unbanked population spread across vast geographies, limited
access to credit, low skill, low productivity and vulnerability to the risk of small
and marginal farmers, rural landless and urban poor and lack of financial and
technological literacy are some of the demand side issues.
Among the supply side challenges, the most cited one is the reluctance of fi-
nancial institutions to serve small value and unprofitable customers with irregu-
lar income. That is to say, banks perceive inclusion as an obligation rather than a
business opportunity. High loan default rates during the past add to the severity
of this constraint. Besides, outlays of different schemes meant for the rural and

Figure 1. Banking correspondents.

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 G. Varghese, L. Viswanathan

urban poor did not translate into outcomes due to the poor delivery mechanism.
The urban poor does not fully utilize the financial services as the transaction
costs are unaffordable to them. Another factor preventing them from accessing
formal financial institutions are the requirement of various document proof. The
poor generally lack documents such as income certificate, birth certificate, ad-
dress proof etc. Nevertheless, the opening of an account alone does not assure
integration with formal economy. It requires one to involve in income generat-
ing economic activities with monetary transactions. The existence of dormant
accounts is the major criticism against the Pradhan Mantra Jan Dhan Yojna
(2014). It is noteworthy that the percentage of dormant accounts with zero bal-
ance is highest in the case of Regional Rural Banks (refer Table 1).
Another barrier to successful implementation of financial inclusion plan is the
highly restrictive nature of banking correspondent (BC) model. The model failed
due to various reasons, like the improper and inadequate use of technology, the
absence of reach and coverage, lack of proper infrastructure etc. The core issue is
the absence of any incentive for BC’s mainly financial stability. The BCs are also
not completely aware of the significance of reputational risk of the bank and act
irresponsibly on many occasions. Thus there is a great need of organizing regu-
lar training programs for BCs. Technological training is also important for better
delivery of services.
Although SHG-Bank linkage model was proclaimed successful in rural areas,
its reach across the nation is highly uneven (refer Table 2). Additionally, it was
observed that the SHGs were unable to procure loans from banks even after a
year of formation and group activities (refer Figure 2). Figure 2 is an excerpt

Table 1. PMJDY accounts opened as on 8.6.2016 (Figures in crores).

Bank Name Rural Urban Total Zero balance accounts (%)

Public Sector Banks 9.70 7.65 17.35 25.89

Private Sector Banks 3.37 0.55 3.92 21.81

Regional Rural Banks 0.50 0.31 0.81 37.69

Total 13.57 8.51 22.08 25.60

Source: pmjdy.gov.in.

Table 2. Region-wise spread of SHGs.

Region No: of SHGs Percentage of total

Northern 372772 5.00

North-eastern 324739 4.35

Eastern 1527618 20.47

Central 786436 10.14

Western 960921 12.88

Southern 3489460 46.76

Source: Status of Microfinance in India (2010-11): A NABARD publication.

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G. Varghese, L. Viswanathan

Commercial Banks

Regional Rural
Banks

Cooperative banks

Figure 2. Bank loans outstanding against SHGs. Source: Status of Microfinance in India
(2010-11): A NABARD publication.

from a larger study entitled ‘Status of Microfinance in India (2010-11) which is a

part of NABARD publication. Interested readers can refer the same for a broader
perspective on the SHG-Bank linkage model.
The rural population relies mostly on informal sector for availing finance at
exorbitant rates. They get caught up in the vicious circle of poverty, debt and
debt repayment and hence fail to access any formal financial services. Lack of fi-
nancial literacy is the major reason behind this. The absence of basic education
prevents people from following even simpler information related to financial in-
clusion. They remain ignorant even about basic products like insurance, bank
accounts, cheque facilities etc. This ignorance poses a challenge for policy mak-
ers in facilitating financial services through the use of technology in rural and
semi-urban areas.

4. Ways Ahead
Substantial investments in social and physical infrastructure as well as in finan-
cial literacy, need-based products, and services along with innovative delivery
mechanism are essential to enable the economy in achieving inclusive growth.
Investment in physical infrastructure will lead to the generation of employment,
improve efficiency, reduce cost and thus will improve the overall standard of
living. Investment in financial literacy is considered as the most crucial step
without which any policy action with regard to financial inclusion will remain
futile. It is the need of the hour to educate the target section about the available
services and to create an awareness about their rights.
Banks need to focus more on introducing tailor-made services and deliver it
through a better and effective mechanism. The credit disbursement should be
made more flexible in order to attract the consumers who are used to informal
sources of credit. Encouraging NGOs and MFIs to participate in this process will
help identify default risk as they work closely with the target population. Provi-
sion of general credit card (GCC) or a limited OD against no-frills account will
increase the access of credit. It will be ideal if affordable insurance and remit-

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 G. Varghese, L. Viswanathan

tance facilities are encompassed in the same plan. Banks should extend the ser-
vice of BCs to include Kirana shops and other local enterprises. At the same
time, BCs need to be properly incentivized and monitored by the banks. Lever-
aging modern technology, eliminating multiple layers of governance, easing
procedures and better participatory role by benefactors can help in building a
better delivery mechanism that provides greater confidence and security.
An affordable and accessible platform to avail the services should be provided.
Post offices could play a proactive role in inclusive growth in areas where there
are no banks and other formal financial institutions. A low-cost solution, based
on mobile technology can be a good platform to deliver financial services. Re-
ducing the risk of agent misconduct, investing in audit studies, conducting risk
management assessments, usage of new and improved technologies to provide
information, and keeping the consumers updated of the changes are some of the
popular and effective strategies that India could adopt from countries like across
Asia and Africa in our journey to an all-inclusive economic growth.
There is a strong need to restructure the financial system, particularly the ser-
vices available for the rural population. A coordinated drive for financial inclu-
sion involving educational institutions is necessary to promote financial literacy.
Regular surveys should be conducted in villages to understand financial needs of
the people and to check whether the products available are actually utilized by
them and meets their expectations. RBI should allow telecom service providers
to provide enhanced banking products at affordable prices. Giving authorization
to microfinance as well as non-banking financial organizations to perform lim-
ited mainstream financial services in remote areas can help improve the reach of
the program. These measures, if effectively implemented guarantees to accelerate
the process of inclusive growth.

5. Conclusion
Financial inclusion is not a short-term goal. It is a progressive initiative, which
will evolve itself over a period of time. The short-term opportunities should be
made use of and the shortcomings should be duly corrected in order to acceler-
ate the process of inclusion. The opportunities and challenges provide useful in-
sights regarding innovative ways of economic value addition, which help the Na-
tion reach a growth trajectory that is sustainable. Therefore, policymakers
should focus on developing policies considering a sustainable banking services
delivery model and need-based products for rural and urban consumers.

References
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Government of India.
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Microinsurance and What We Can Do About It. Briefing Note 17, Microinsurance
Innovation Facility, Geneva.
[3] Burgess, R., Pande, R. and Wong, G. (2005) Banking for the Poor: Evidence from

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India. Journal of the European Economic Association, 3, 268-278.

https://doi.org/10.1162/jeea.2005.3.2-3.268
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DOI: 10.4236/tel.2018.811126 1942 Theoretical Economics Letters