India Moves Toward Universal Financial Inclusion
The 2017 Global Findex shows that India has significantly improved financial inclusion over the past four years. According to Findex, 53 percent of adults had accounts in 2014. By 2017, that number had jumped to 80 percent — a remarkable addition of 300 million accounts in just a few years. Importantly, traditionally excluded groups shared in these gains. Women saw a 30 percent increase in account ownership, and the poorest households saw a 40 percent increase. Intermedia’s 2018 Financial Inclusion Insights (FII) survey corroborates these findings. Yet both surveys show that challenges remain, especially on use.
Government policies driving financial inclusion
The latest Findex and FII surveys agree that the Jan Dhan Yojana scheme (PMJDY) has been the principal driver of increases in financial inclusion since the 2014 Findex. Launched in 2014 by Prime Minister Narendra Modi, PMJDY mandated that state-owned banks open at least one account for every unbanked household. Most accounts opened since then have been at the state banks. According to the PMJDY website, private-sector banks accounted for just 9.9 million of the 317.3 million accounts opened by May 2018 (3.1 percent). In terms of account ownership, India is now on par with China, another country with strong state backing for bank-led financial inclusion.
A few other factors have also increased account ownership since 2014, all spearheaded by the government. India’s biometric identity scheme, Aadhaar, reached near universal adult coverage, making it easier for people to verify their identities and open accounts. The Unique Identification Authority of India reports that 1.21 billion Aadhaar numbers had been issued by June 2018. Findex shows that 90 percent of unbanked adult Indians say they have proof of their identity. Furthermore, the 2018 State of Aadhaar report shows that 84 percent of people used Aadhaar as proof of identity to open their most recent bank account.
A growing number of government benefit programs have also played a role by increasing the demand for accounts among poor people. In the 2017/2018 fiscal year alone, the Indian government paid $28.92 billion in benefits to 1.24 billion people. These payments included everything from housing and cooking gas subsidies, to rural employment wages, to scholarships.
India’s decision to offer full-service accounts further increased demand. Previous attempts to open accounts for excluded people were hampered by the fact that banks offered accounts with limited functionality. There were maximum account balances, ATM cards were not issued, check deposits were not permitted and customers were allowed to transact at agents but not at branches. PMJDY mandated full-service accounts that are more useful to clients. By the end of 2017, over 75 percent of PMJDY account holders had a RuPay debit card. This card provides access to the ATMs and point-of-sale devices of over 1,500 member banks of the National Payments Corporation of India system.
Gender and income gaps are narrowing, but use remains a problem
Excluded groups are finally obtaining accounts, driving overall increases in financial inclusion. Findex shows that 20 percent more men than women had accounts in 2014. By 2017, this gap had shrunk to 4 percent. Similarly, the gap between the richest 60 percent and poorest 40 percent of adults in 2014 was 15 percent. This decreased to 5 percent by 2017. FII data corroborate the increase in account ownership for women: just 39 percent had an account in 2013, in contrast to 76 percent in 2017.
Use also presents a significant challenge. FII reports that only 54 percent of registered account holders conducted a cash-in or cash-out transaction within the previous 90 days. Findex finds that a lower proportion (48 percent) of account owners made at least one deposit or withdrawal in the past year. Although the latest Findex figure represents a 5 percentage point improvement since 2014, it is a relatively low percentage compared to countries like China, which has been pursuing financial inclusion longer than India has.
The Findex and FII reports both speculate that account use is low in India because so many accounts are recent and that use rates are likely to increase over time. PMJDY shows that use is already gaining steam, with a threefold increase in account balances from 2014 to 2017 ($11.60 to $34.50). This increase in balances is encouraging. The 2017 Findex found that only 20 percent of people in India had saved at a financial institution in the past year, compared with 31 percent for all developing economies.
What should India focus on now?
The most important challenges ahead are to increase account use and reach those who are still excluded. Through policy changes, India has created a differentiated banking structure that includes payments banks and small finance banks intended to serve poor people. While these are fledgling institutions, they could play a catalytic role by introducing products and services designed for low-income populations, encouraging India’s newly included citizens to engage with formal financial services more deeply. India should explore how to incentivize these new banks to play this role. For instance, these banks could be considered for direct benefit transfer schemes.
Building out agent networks will also be necessary to overcome challenges in reaching excluded populations. Most transactions in India still take place in cash. Especially for people who are new to formal banking, an accessible cash/digital interface enabled by agents will be important to inspiring greater account ownership and use. RBI data show that banking outlets (including agent locations) increased from around 450,000 in 2014 to 700,000 in 2017, even before payments banks became operational. A recent MicroSave report shows that between 2015 and 2017, the median daily number of transactions conducted by agents (including cash-in/cash-out) increased significantly, with government-to-person (G2P)-related services being a major contributor. It also showed that the tenure of active agents doubled. Given the close relationship between G2P payments and agents’ revenues, especially in harder to reach areas, increasing agent incentives under G2P programs could be a good way to increase the number of agents in rural areas.
Misleading to refer to the growth of PMJDY accounts as a measure of successful financial inclusion without also referring to the large percentage of these accounts that are unused and/or have zero balances.