InterMedia’s Financial Inclusion Insights (FII) 2016 India Annual Report on the findings of our fourth annual tracking survey of 45,540 individuals in India showed that financial inclusion, defined as the percentage of adults who hold an account with a formal financial institution, was 63 percent in 2016, reflecting essentially the same level as in 2015 (Figure 1). This lack of growth is perhaps surprising after strong growth in previous years; between 2013 and 2015 financial inclusion increased by 18 percentage points. This finding may lead readers to believe the uptake of formal financial services has plateaued in India. Yet, a closer look at the FII data paints a more nuanced picture and reasons for optimism. Here are several major takeaways from the 2016 report:
Policy matters. The Pradhan Mantri Jan-Dhan Yojana (the Prime Minister’s People’s Wealth Scheme, or PMJDY), launched by Prime Minister Narendra Modi in August 2014, had a big impact on financial inclusion over the last few years. PMJDY, an ambitious government initiative to increase financial inclusion nationwide through access to banking facilities, specifically sought to ensure that every household had at least one registered bank account by 2018. The government increased the number of brick-and-mortar banks by heavily targeting rural communities with banking correspondents and installing more ATMs throughout these areas. These efforts led to significant increases in account registration. For instance, Kerala is reported to be the first state to successfully achieve 100% account registration for all households under the PMJDY scheme and India is now home to the highest rate of access to banks out of the eight FII countries surveyed in Africa and Asia. More specifically, after PMJDY’s launch in 2014, the FII data shows that steadily increasing numbers of adults registered bank accounts. In fact, the 18 percent jump in the percentage of the population with a registered financial account between 2013 and 2015 derives in large part from a 16 percent jump in the proportion that held a bank account during the same period (nonbank financial institution and mobile money accounts registered practically no increase (Figure 1)).
Further, PMJDY not only helped increase the number of bank accounts but also reduced account dormancy. FII research found that 21 percent of bank account holders in 2016, or 13 percent of adults overall, reported opening an account under PMJDY. This number could be even higher, given the large number of individuals who were unsure of the specific scheme under which their account was opened (Figure 2). Further, FII data shows that PMJDY account holders in 2016 were more active than non-PMJDY account holders. This suggests that PMJDY effectively reduced barriers to access and that newly registered accounts met real user needs.
The FII surveys count individual account holders, while PMJDY targeted one account per household. Further gains in financial inclusion may, therefore, depend on shifting focus from the household to the individual level. For instance, efforts could target individuals’ very low levels of financial literacy, defined by FII as the proper understanding of finances such as interest rates, inflation, or risk diversification, given that only 17 percent of the population was financially literate in 2016.
Inclusion increased significantly among India’s traditionally marginalized communities over the last few years, shrinking the gaps between men and women, rural and urban, and above and below poverty populations. Between 2013 and 2016, the proportion of female, rural, and below-poverty adults with registered bank accounts showed a greater increase than the population as a whole. While the proportion of bank account holders among male, urban, and above-poverty adults showed a slight decrease between 2015 and 2016, female and rural adults registered a 1 percent increase, and those below the poverty line saw a 3 percent increase. FII 2016 data shows that account ownership was slightly more prevalent among rural and below-poverty adults than their urban and above-poverty counterparts (Figure 3).
* Statistically significant difference between groups; Chi-squared p<0.0001 for all demographic categories
Expanded efforts to provide banking facilities to underserved parts of the country may have actually led to the 5 percent decline in adults who hold accounts with nonbank financial institutions (NBFIs) as users shifted to banks. The FII data indicates and others have argued that microfinance institutions (MFIs), cooperatives, and other NBFIs such as Village Savings Groups lost ground to banks in 2016. NBFI account ownership also dropped from 9 to 4 percent from 2014 to 2015 and did grow in 2016. This change may be due to the expansion of banks in areas of the country that did not always provide access to financial services, including rural areas.
Those who stopped using NBFIs were primarily bank account holders who continued using their bank accounts, but no longer needed or wanted their NBFI accounts. In 2015, 8 percent of adults used both a bank and NBFI, while 56 percent used just a bank. In 2016, 4 percent of adults used both banks and NBFIs and 60 percent used just a bank. This may be due to differing costs and quality and/or an overlap in the type of services offered by NBFIs in comparison to banks. As banks increasingly reached rural and poorer parts of the country, more Indians are adopting banking services in conjunction to or instead of their NBFI accounts.
Advocates of digital financial services (DFS) will face a steep climb to expand financial inclusion through the greater adoption of DFS. The FII data show that awareness of and access to DFS, such as mobile money, lag far behind traditional financial services in India. For example, mobile money continued to be insignificant in 2016 with less than 1 percent of adults using these services. While FII analysis shows that increasing numbers of Indians who are aware of mobile money are becoming users, awareness levels are low and not increasing from year to year. DFS also faces a technological barrier to uptake: FII data shows that mobile phone access and ability to text were relatively low in India in 2016 -- 68 percent and 26 percent respectively, and have not improved over the last few years.
Overall, the PMJDY initiative helped drive an increase in bank account registration which led to greater financial inclusion over the last few years, particularly among traditionally marginalized groups – those below the poverty line, rural residents, and women. Looking forward, further growth in financial inclusion will depend on whether the country will direct its strategy at including all individuals, rather than only one account for household, as well as taking actions to enable and promote the greater use of DFS.
Follow us on Twitter for other updates from the InterMedia FII team.
For more information about FII’s research on India including FII’s upcoming demonetization study, please contact:
Financial Inclusion Insights
Financial Inclusion Insights is an ongoing research program funded by the Bill & Melinda Gates Foundation and designed to build meaningful knowledge about how the financial landscape is changing across eight countries in Africa and Asia (Bangladesh, India, Indonesia, Kenya, Nigeria, Pakistan, Tanzania and Uganda). FII produces data and analysis regarding citizens’ financial lives, attitudes, awareness and use of, access to, and advanced engagement with financial products and services. Through our qualitative and quantitative research, we aim to provide demand-side insights into consumers' financial behaviors, produce information that can guide policy interventions, and identify pathways for the poor to gain the financial tools they need to improve their economic circumstances.
 The FII team is monitoring the impact of the Modi government’s November 2016 demonetization policy on financial inclusion. Demonetization occurred once most of the FII 2016 data collection had been completed and is not thought to have affected the 2016 data in a statistically significant way. Yet, it sure to have an impact on the 2017 numbers and has already had a number of effects on the Indian economy. More information on the effects of demonetization on Indians’ engagement with financial services and adoption of DFS will be available soon via a follow-up study conducted by the FII team in mid-2017.