An Evidence-Based Path to Financial Inclusion in India

The concept of financial inclusion is no novelty in India. The government has promoted the expansion of bank account use for decades through a business correspondent (BC) distribution model and other strategies. But the push for financial inclusion has gained momentum and prominence this year, based on what I and InterMedia Research Director Colleen Learch heard at the Inclusive Finance India Summit in Delhi Dec. 8-9, which was organized by Access Assist.

This has indeed been a landmark year for financial inclusion in India, reflecting strong commitments by the new government and the Reserve Bank of India, the country’s central bank. A sense of optimism was evident at the Summit, in light of recent developments in the market:

The country’s central bank, the Reserve Bank of India, has paved the regulatory way for “payment banks,” which open the door for mobile operators and others to become non-banking finance companies (NBFCs) and provide digital financial services.
The norms for BCs and bank agents have been eased, allowing banks to engage local financial service providers as their agents. Many of these local providers are well established in rural areas and enjoy high levels of trust among their existing customer bases.
The Prime Minister’s new Jan Dhan Yojana (PMJDY) plan aims to provide a bank account to the entire unbanked population of India in a matter of months. This was a hot-button topic at the Summit, with participants expressing a range of views, from a truly revolutionary social program to “old wine in a new bottle,” given past attempts to propagate low-cost bank accounts.
The emergence, albeit still nascent, of digital financial service options which potentially can expand financial services access to many more Indians.

To provide a statistical underpinning for the discussion, we presented insights from InterMedia’s 2013 Financial Inclusion Insights India Tracker Survey of 45,024 Indian adults at a panel session focused on Measuring and Advancing Financial Inclusion through Evidence Indicators. The panel also included speakers from MIX, CRISIL India, Moody’s Corporation Social Performance Group, and Indicus Centre for Financial Inclusion, and was moderated by Graham Wright of MicroSave.

The FII India Tracker Survey, which is being repeated annually, yielded a few key data points related to India’s financial inclusion debate:

High bank account dormancy. The survey showed that 47 percent of Indians have their own bank account but half of these accounts lie dormant.
Dormant accounts don’t mean dormant financial lives. The survey showed, for example, that 25 percent of Indians save for the future, 31 percent have taken out a loan, 33 percent have sent or received money in the past 90 days, and 40 percent have purchased mobile service top-ups in the last 90 days. In other words, there is latent demand for appropriate financial services.
Low awareness and uptake of digital financial services. Technology access doesn’t automatically translate into uptake of digital financial services/mobile money. Eighty-five percent of Indians have access to a phone, but India also has one of the lowest rates of mobile money use (0.3%) among the eight FII countries surveyed. Only 6 percent of Indians have even heard of mobile money.
Prominent geographic disparities in bank account use. By state, the percentage of bank account holders ranged from a high of 65 percent to a low of 29 percent. Rates of active bank account use (respondents used their accounts in the past 90 days) followed similar patterns.

As far as key takeaways for providers of financial services, we offered these:

SHIFT THE INCLUSION FOCUS FROM BASIC ACCESS TO PROMOTING MEANINGFUL USE. The huge push to open bank accounts needs to be accompanied by efforts to understand why use lags. Trust and literacy appear to be key factors in lack of active use, which need to be explored further.
TARGET LAGGING REGIONS: India does not operate as a monolith. Some states lag, some do exceedingly well. India’s financial inclusion strategy can be optimized by a more region-centric approach for building access and usage.
BRIDGE SOCIAL DIVIDES: For example, women, especially in the north, lag behind in both access and ownership as well as active use of digital financial services. These gaps are significant and exist in well-performing states as well.

Our conversations at the Summit also confirmed the need for empirical data analysis to build better models for accessing and using basic banking services and digital financial services. There is also a clear and demonstrated need for granular data that explains financial inclusion in India’s states and districts, and a need to consider both quantitative and qualitative data to be able to address financial inclusion gaps.

Our Summit panel members agreed that, along with more effective analysis of data, it is equally important is to contextualize and articulate data and evidence for policymakers so they can act on it swiftly and decisively. This is at the ultimate goal of the research we conduct within the Financial Inclusion Insights Program