What barriers does India face in including the last mile in its financial network? Suggest solutions for the same. (15 Marks)

Mentors Comments:
1. Mention the state of financial inclusion in India.
2. Highlight the challenges for the same and barriers in improving the situation.
3. Provide solutions to address the issue.

Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost.  It has been recognized as a key building block that will form the foundation for achieving several of UN’s Sustainable Development Goals.


  • Failure of government schemes:
    • Jan Dhan Yojana:
      • Disquieting feature is that public banks, regional rural banks, and 13 private lenders reported that as march 2017 around 90 lakh accounts were frozen under the PMJDY owing to inactivity.
      • Only 33 percent of all beneficiaries were ready to use their Rupay cards.
      • Merely opening physical accounts as flag posts of financial identity won’t help unless they are actively used by people for managing their money. 
    • Financial literacy:
      • India is home to 17.5 percent of the world’s population but nearly 76 percent of its adult population does not understand basic financial concepts.
    • Insurance policy issues:
      • On account of the lack of awareness and failure of institutions to guide them, people buy insurance policies without planning and give up midway because they don’t have money to pay premiums.
      • Aggressive selling prevents agents from assessing the consistency of income streams of the buyers for servicing their policies.
      • Customers end up losing heavily as penalties are harsh. According to the insurance regulator, IRDAI, in 2016, Five years after being bought, two-thirds of the life insurance policies are no more.
      • This shows customers are losing huge money on account of bad financial planning.
    • Access to Credit
      • But despite the strong growth, only 200 million borrowers have had access to credit from formal channels This is the reason why the credit penetration index of CRISIL Inclusix remained low
      • There is also a large degree of self-exclusion due to the existence of informal credit sources meeting their convenience. 
    • Digital Connectivity issues:
      • When most of the rural areas still not having even a reliable internet facility it is difficult to push for a cashless economy.
    • From the demand side, the reasons are low income, poverty and illiteracy and lack of awareness. 
    • From the supply side branch proximity, timings, cumbersome documentation and procedures,
      attitude of the bank staff and language.
    • Remoteness from the financial institutions
      • Usually, banks are locating their branches in the high densely populated areas for covering their cost of operations. 
      • Unfortunately, people are scattered in rural India. The population densities of rural areas are very low. The remoteness of the financial institution makes rural people do not utilize such services. They have to travel far to approach these institutions which is again time and cost consuming process. 
      • Low penetration of financial services, less efficiency of business correspondents also limits the success of financial inclusion. 
    • The complex financial services market offers a wide range of products however lack of awareness restricts the use of these products.
    • Flexibility in terms of financial communication is the biggest roadblock to true financial inclusion in India. 
    • Low and Irregular income:
      • Income level is one of the prominent factors that hinder the underprivileged from availing services from banks. 
      • The majority of the people’s income level in the rural area is low and irregular too. A major portion of people is in seasonal employment. Hence, income level decides people’s saving and investment avenues. 
    • Inappropriate products: 
      • Generally, banks are targeting the educated and high-income groups of people. They develop financial products based on these target groups’ requirements. The needs of low income and weaker section of people are quite different. This increases the percentage of financially excluded people in society. 
      • Marginal farmers, landless laborers, oral lessees, self-employed and unorganized sector enterprises, urban slum dwellers, migrants or ethnic minorities and socially excluded groups, senior citizens and women are out of the preview of financial inclusion. 
    • High Cost:
      • Nowadays banks are operating for profit under the competitive environment. They levy charges for different transactions like minimum balance requirement, charges for usage of ATM services, processing fees, etc. People are already suffering from low and irregular income.
      • Therefore paying these kinds of excessive charges make them more burdened. 
    • The attitude of employees: 
      • Employees of the formal financial institutions give differential treatments to dissimilar target groups. The high-income group receives overwhelming response whereas low income and rural people suffer from bitter experiences. This affects the self-respect and dignity of the people and hampers the financial inclusion process. 
    • Lack of proper Documents:
      • As per the norms of the banks, it is mandatory to submit legal documents at the time of opening an account. 
      • The majority of the poor people like migrants, tribes, etc cannot access formal financial services due to lack of having any legal documents. Getting a legal document is an expensive and time-consuming process.

Way forward:

  • Financial inclusion can spread faster if there is a sharper focus on enhancing branch and credit penetration beyond south India. Policymakers need to continue incentivizing branch and credit penetration in districts with low CRISIL Inclusix scores.
  • Cascade training model:-
    • A bank undertook a project to deliver financial education training to young women in rural communities through a cascade training model where core trainers trained peer educators, who in turn trained community members. These examples provide evidence that using a model that involves experiential learning and the use of products has greater chances of success.
  • To use financial services to their full potential, low-income people need products well suited to their needs and appropriate training and education for adapting to these financial services. 
  • To increase cashless transactions:-
  • To venture into the vastly untapped domestic smartphone network which is estimated to cover around 500 million users in the next five years.
  • UPI has the potential to lift service delivery paradigms to the next level.

The government is committed to its target of increasing the inclusion of every household in the financial system thus strengthening the social contract so that the masses can get all the legitimate benefits arising out of the growth of the country and also provide an extra thrust to lead the path of growth

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