Over the last few years, India has made significant strides in terms of financial inclusion. As per the World Bank’s Global Findex Database, that is. However, there remain multiple areas of concern, including high rates of account inactivity and negligible use of digital payments. This article analyzes the recently released Global Findex data to chart the progress India has made in financial inclusion and the challenges to be addressed in the future.
The last few years India has witnessed significant progress on the financial inclusion front. According to the World Bank’s Global Findex database, 80 per cent adults in India have a financial account now, up from 53 per cent in 2014 and 35 per cent in 2011. The most impressive part of this growth is that an increasing number of women and the economically vulnerable have opened account at financial institutions. 77 per cent female adults have an account, compared to 43 per cent in 2014 and 26 per cent in 2011. The gender gap in account ownership has reduced drastically. In 2014, men were 20 percentage points more likely than women to have a financial account. That gap has now shrunk to 6 percentage points, which is less that the global gap of 7 percentage points.
Similarly, account ownership amongst the economically vulnerable has also shown good growth. Account ownership amongst 40 per cent of the poorest households increased from 27 per cent in 2011 to 44 per cent in 2014 and finally to 77 per cent in 2017. The gap in account ownership between 40 per cent of the poorest households and the richest 60 per cent households have decreased significantly from 16 percentage points in 2014 to 5 percentage points in 2017. An important factor driving this growth is the Pradhan Mantri Jan Dhan Yojana (PMJDY) which has added 316 million financial accounts since its inception in 2014. Indian government’s push to increase account ownership through biometric identification cards helped narrow the financial inclusion gap between males and females as well as between the rich and poor.
Of course, there are still challenges to be surmounted. 190 million Indians are still unbanked, second only to China. Reaching this last but a big and important financially excluded segment will take more than just the government programs. Another significant challenge is the high inactivity rates. In end-2016, approximately 25 per cent of accounts created under the PMJDY initiative had zero balances. As per the Global Findex database, 48 per cent of Indian adults who hold accounts have not executed any transactions pertaining to deposits or withdrawals over the past one year. More efforts are needed to educate customers about using their accounts for transactions.
Another area of concern is high cash usage. Despite significant growth in the number of bank accounts, people still prefer to send or receive money, pay bills and purchase at merchants using cash. Digital payments are yet to cross the chasm and reach a majority. According to Global Findex database in 2017 a mere 29 per cent of Indian adults have made or received payments digitally. In addition, only 5 per cent of Indian adults have used their mobile phone or the internet to access an account. The bad news is that this is lower than African and South Asian countries like Kenya, Tanzania, Zimbabwe and Bangladesh. There is a silver lining, though, with the government aggressively pushing digital payments. Mobile-enabled payments are, of course, an important part. BHIM, UPI and Bharat QR have laid the ground for the growth of mobile payments in the country and the results are positive. For example, the leakage of funds for pension payments have dropped by 47 percent (2.8 percentage points) due to payments being made using biometric smart cards rather than being handed out in cash
The government is taking steps to enhance usage of digital payments. For instance, all government offices are encouraged to accept payments via UPI and QR codes, a QR code is required on each utility bill and an increasing number of merchants are being encouraged to adopt BHIM and UPI. The growth of mobile payments is on the right trajectory, and consumer education about its usage and benefits can accelerate its growth.