Can Financial Inclusion remain a part of the Growth Plan?

Posted in Finance Articles, Total Reads: 4988 , Published on 30 December 2013

According to the United Nations standards, goals of financial inclusion policy include access of entire range of financial services at a reasonable cost for all households. This includes services like savings /deposits, payment and transfer as well as credit and insurance. One goal strives for sound and safe institutions that are governed by clear regulation and industry performance standards. Financial inclusion principles should establish financial and institutional sustainability, which ensures continuity and certainty of investment providing a cushion for contingencies as well. The last and final goal of financial inclusion includes promoting competition to ensure diversity of choices and affordability for clients.

Image Courtesy: renjith krishnan,

Indian Economy Growth Challenges

After the great recession and Euro zone crisis the developed countries have started heading upwards showing signs of sustainable expansion in their economy but to the contrary emerging markets like India, Brazil, South Africa is making hard landing finding difficult to sustain their economy growth ( refer figure 1).

We can observe that India GDP has dropped to almost 4.5% in 2013 from 10% in 2009 the period after recession. The attributes attached to the downward winds of Indian economy is the increased uncertainty in the global markets, high gold imports (refer figure 2) which constitutes 10% of total import bills which has contributed significantly in CAD deficit, high subsidies

Bills, lack of lucrative policies and reforms, and increasing scandals, which has shattered not only domestic investor confidence over the time but foreign investment too.

Impact of recent policy developments

The recent talks of bond tapering by U.S. Federal Bank by year-end have also resulted into instability in FOREX market causing worries among investors, which led to undervaluation of Indian Currency (Rupee) and added concern over glooming Indian Economy.

The new reform by the government of India on Food Security Bill had anticipated investors and corporate fueling expectation of widening fiscal deficit which has already reached 3.4 lakh crores or 62.8% of the estimated budget in the first four months of the financial year.

The new amendments made in the Land Acquisition bill, the protector of the owner interests will also contribute to slowdown in housing projects and land acquisition by corporate due to significant rise in cost by almost 25-30%.

Finally on August 30th, 2013 it was reported that the third largest economy of Asia , India grew by only 4.4% in the quarter ended Apr-Jun’13 down from 4.8% compared to last quarter confirming fears of deepening slowdown in the Indian economy. Capping this slowdown is now a major challenge for the government and RBI.

All these discussed facts have been factored significantly in the depreciation of Indian rupee despite of interventions in the market by RBI. This is key reason for the sharp depreciation of Indian rupee from levels of Rs. 45 to Rs.68 (approx.) in span of three years.

Under this increasing uncertainty the question which comes in our mind is can India sees 10% growth again? If yes, which policies to contribute most?

Financial Inclusion can turn out to be the significant contributor in reviving Indian GDP growth story back to ten percent . The population of India is the second highest in the world after China and almost 70% of the population resides in rural area. Most these population still do not have access to the basic financial products and services which bring our attention on the underlying opportunities in rural economy . Facilitating access of financial products to these rural masses and other low level income group would catalyze our growth.

Since the arrival of banking sector in Indian in 1770s, India has shown a remarkable growth in banking particularly retail banking. The industry has a high penetration in the urban areas particularly between the middle and upper class of the society. But, even today a vast strata of the country is relatively unaware of these facilities available to them. Financial inclusion schemes target this particular segment of potential customers.

Data recorded for the past few years clearly indicate that the growth of rural economy has continuously surpassed urban (refer fig 3). This has shifted the focus towards rural India as a target with higher growth potential. It has been realized that this growth can be boosted further with schemes for financial inclusion. Once carried out such schemes can revolutionize entire growth saga of rural sector as well as SMEs (Small and medium scale enterprises).

The survey conducted by National Sample Survey Organization (NSSO) confirms the increase in consumption level of rural India towards Urban consumption items.This increase in consumption is mainly due to increase of income level in rural areas and globalization. Annual Survey of Industries also points to the fact that ratio of wages per employee has increased in rural India compared to urban India by 20%. Thus, there lies a tremendous scope of penetration of financial services in rural India.

These factors make us believe that there is huge capital in rural areas which are unemployed as cash or other assets. Thus, tapping those potential groups by creating awareness and financial inclusion policies can help us to make the efficient use of resources of our economy. Private and public organizations are investing millions of rupee in these sector but still there are big challenges ahead.

Challenges Ahead

In a decade government has adapted various tactics to attain the objective of financial inclusion. RBI has stressed banks to make available basic banking ‘ no frills’ account either with ‘NIL’ or very minimum balances as well as charges to make financial service available to vast section of the population. In these strategies, RBI has provided relaxation on KYC (Know Your Customer) norms, simple branch authorization, setup of business correspondents (BCs) to simplify door step delivery of financial and banking services and Electronic Benefit Transfer (EBT) linked with Aadhaar Card to transfer social benefits directly to the beneficiary eliminating middle- man and lowering transactional cost.

The major challenge to financial inclusion is most of the rural masses are still not aware of the financial products and its benefits. To educate and create awareness amonga these groups remain a key challenge for RBI. To promote awareness about financial services across India RBI have launched its new initiative “National Strategy for Financial Education” on July 16, 2012.

Second challenge is decent parts of the “no frills” account are dead accounts or inoperative in which transaction rarely occurs. It remains a challenge for banks and RBI to bring those accounts into active stage and it demands the need of more incentives. This also brings sustainability challenges to some of the branches operating in rural India.

Third challenge is to avail credit facility to rural India at a reasonable cost. Micro finance industry contributes significantly in attaining financial goals. But easy credit policy has resulted consumer becoming quickly over-indebted to the point of committing suicide.

To address these challenges new RBI governor of India Raghuram Ranjan also focused on accelerating financial development and inclusion in his first speech and reminded credit access to poor remains hard and we need faster growth leading to reduce poverty.Since larger companies are facing slowdown so boosting small and medium enterprise will be the important engines of growth.

To attain financial inclusion objective RBI has also planned to issue circular soon to free completely bank branching for domestic scheduled commercial banks in every part of the country. No longer now banks have to approach RBI for permission to open the branch. This action will extend the freedom of decision making to the banks. Furthermore, issue of new banking license will increase the competition among banks leading to gain access of financial products and services to more parts of the country.


Despite of these challenges and looking broader picture and developments taking place in rural India and RBI policy supporting the same financial inclusion will be a key driver for growth of Indian economy leading to decline in poverty and better lifestyle of low income level group of India in next ten years.

Going back to the history, the importance of Financial inclusion policies in India can be understood by the gravity of projects carried out to promote it. The best example is preceding Lok Sabha elections the Congress party under Chidambaram’s guidance, in 2008 announced huge increases in pre-election National Rural Employment Guarantee Act (NREGA) spending. This plan worked well in bringing Congress back to power.

We believe that when financial inclusion will achieve its stated objective we will be witnessing new India in which gap between rural and urban India will become more narrow leading to robust growth opportunities. So what you think financial inclusion should remain part of the growth plan or not ?

This article has been authored by Aparajita & Ankit Agrawal from IMT Ghaziabad



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