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India’s Unfulfilled Dream of Financial Inclusion

Posted in Finance Articles, Total Reads: 2103 , Published on October 28, 2014

Banking to end “financial untouchability” is one of the biggest agendas Narendra Modi has which was proved when he announced the Pradhan Mantri Jan Dhan Yojana on 15th August 2014. The scheme ensures opening of bank accounts for millions of people in this country who are not a direct part of the Indian Banking System. It opened 15 million accounts on the first day of the onset of the program and promises to open 75 million accounts by the end of January 2015. The term “Financial Inclusion” was introduced by K C Chakraborty in 2005, then Chairman of Indian Bank in order to have a better access to credit. Right from that period RBI has come up with a lot of initiatives to spread financial literacy among the people especially the rural sector.

The traditional purpose of Financial Inclusion is to include everyone in the gamut of banking and financial stability. It also helps in giving the nation a huge pool of savings that can be further invested to earn profits. But more than that, it will also help the poor to come out of the clutches of the money lenders who come up with unethical ponzi schemes.

Image Courtesy: freedigitalphotos.net, jscreationz


The Indian banking system came up with a new concept of “no-frills account” in 2005 which further became famous as Basic Savings Bank Deposit Account (BSBDA) in 2012. Basically this is a type of account where the customer can have a bank account with zero balance and also possesses the facility of ATM/Debit card without any charges.

The next step by RBI was to permit the banks to appoint Business Facilitators (BFs) and Business Correspondents (BCs) in 2006 who act as intermediaries who deliver door-to-door banking services which reasonably reduces the “last-mile” problem. After this a series of bank outlets opening was done in the villages of a population more than 2000.This scheme will be succeeded by opening up of outlets in villages having population less than 2000 by March 2016.

On an average approximately 40% of the Indians lack access to even a normal savings account. During Subbarao’s tenure announcement of the requirement of the banks to open up its 1/4th number of branches in places having population less than 10,000 was done. To make things simple proposal for a liberalized KYC (Know Your Customer) norm was done along with introduction of a special identity number making it convenient for the customers to access their accounts.


Soon after Raghuram Rajan becoming the governor, a lot more improvement in this field took place. Foreign banks which started off with the banking services in India before August 2010 were allowed to work in their branch mode and were incentivised to be converted into WOS (wholly-owned subsidiaries) but banks which have started their operations after 2010 need to fulfill a bunch of criteria to qualify the test of RBI. The initial minimum paid-up voting equity capital should be Rs 5 billion for the WOS, the bank should be meeting all the BASEL III requirements .The new policy says that at least 25 percent of the total number of branches (initially proposed by Dr Subbarao) that has been opened during the first financial year must be opened in unbanked rural area.


Despite so many provisions the penetration of banking services remains low. The first reason is that in spite of opening up of accounts and branches, almost 90% of these accounts remain dormant. People still do not believe in saving money in the banks which is because of financial illiteracy. The government and the RBI are focusing on the steps to open up accounts but focus on the continuation of usage of those accounts is minimal. And the second one is that the banks do not find the business lucrative to do rural banking since the deposits are low. A lot of foreign banks would rather want to set up its subsidiaries in some foreign country than getting a license to do it in India by opening up its branches in rural area. Hence, it’s very important to spread financial literacy among the people and teach them the importance of banking.

This article has been authored by Pushpanjali Mitra form Symbiosis Institute of Management Studies

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