Financial Inclusion in India and Its Challenges

Financial Inclusion in Age of Digitization


From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Financial inclusion and Digital divide

Financial Inclusion


  • The use of technology in financial inclusion stands to be pertinent in today’s context as it paves the way towards inclusive growth through the upliftment of disadvantaged sections of society.

Importance of Financial Inclusion

  • Meaning of Financial inclusion: It refers to the availability to both individuals and companies of useful and cost-effective financial goods and services, including payments, transactions, savings, credit, and insurance, that are sustainably and ethically provided.
  • Provides social mobility: The importance of financial inclusion lies in the fact that it allows social mobility. These resources help empower individuals and foster communities, which can aid in promoting economic growth.
  • More financial services: Moreover, account holders are more likely to utilize additional financial services such as credit and insurance to launch and grow enterprises, make investments in their children’s or own health or education, manage risk, and recover from financial setbacks, all of which can enhance their overall quality of life.

Financial Inclusion

Challenges to the financial inclusion

  • Inoperative bank accounts: Nearly 80 percent of the Indian population has a bank account, and nearly 18 percent (81.38 million) of bank accounts are inoperative, having “zero balance”. Moreover, up to 38 percent of accounts are inactive, which means that there have been no deposits or withdrawals in the past year, demonstrating that many Indians are still not fully integrated into the formal banking system.
  • Poor telecommunication infrastructure: India still needs a robust telecommunication infrastructure with a stable broadband internet connection. Despite progress in increasing technological features with increasing speeds, the inability of the entire country to adapt to these innovations has widened the gap.
  • All citizens are not cell phone users: India additionally faces the hurdle of getting its citizens online, with more than 310 million individuals needing a basic cell phone. This prevents account holders from receiving crucial information, such as details relating to account transactions.
  • Increasing dependency on local agents: In addition, financial institutions also need to be more willing to deliver messages for transactions of small quantities. These factors have led to an increasing dependency on local agents.

Financial Inclusion

The correlation between Technology, digital divide and financial inclusion

  • Rural- Urban digital Divide: There is an evident divide between the urban-rural regions that dominate India. Only 4.4 rural families have computers, compared to 14.4 percent of urban households and 14.9 percent of rural homes have internet connectivity, compared to 42 percent of families in metropolitan regions. Meanwhile, only 13 percent of adults in rural regions have access to the internet, compared to 37 percent in metropolitan areas.
  • High lending rates in rural area: Specifically, such gaps are associated with various factors in finance, starting with small-time lenders charging high-interest rates common in rural regions. Access to credit still needs to be solved. Government programmes are yet to reach more remote areas to improve loan availability efficiently.
  • Unawareness about Online loans: Individuals find that online loans need more options from reliable financial institutions or digital lending. Additionally, rural clients need help accessing prospective financial services due to complicated banking procedures such as requiring identity credentials and maintaining a specific balance in an account.
  • Limited access to technology: The digital divide is also a result of limited access to computer and communication technologies. In India, fewer people can afford the device needed to access digital information.
  • Single nationwide approach is problematic: India additionally faces the burden of providing diversified content across different regions, as individuals across India have different mother tongues. Moreover, the number of individuals who have access to computers or are knowledgeable enough to utilise the internet varies too widely between states. Thus, a blanket approach cannot be implemented nationwide.
  • Lack of Financial literacy: Indian citizens lack the potential to maximise technological interventions. About 266 million adults are illiterate. The lack of financial literacy has also greatly impeded the growth of financial inclusion, with many financial cyber-crimes peaking in proportion to the growing distrust among rural residents, leading to lower adoption rates and a 6-percent jump in cybercrimes in the same year.
  • Concerns of data privacy: As Personal Identifiable Information (PII) guidelines are not strictly enforced and adhered to, large quantities of data are readily accessible to numerous parties, raising serious concerns about data privacy.

Financial Inclusion

What can be done to bridge digital divide for financial inclusion?

  • Digital inclusion strategies: It lies in the hands of the government to implement a financial inclusion policy and look at the reasons behind financial exclusion and effectively address them. Information and Communication Technology policies are primarily top-down and supply-focused. Thus, it is necessary to develop financial goods and services focused on the needs of citizens and the disadvantaged. These policies should focus on digital inclusion strategies to ensure that rural areas can access proper internet connectivity.
  • Information in regional language: to ensure digital financial inclusion, the government should encourage the middle-aged bracket to educate themselves in reading and writing to use the various facilities they provide. Government websites have information primarily in Hindi and English, excluding large sections of the population. A systemic strategy focused on digital skills, and financial literacy should be implemented in each region, keeping in mind the language barrier and access to technology.
  • Focus on vulnerable sections: To combat financial fraud, implementing a one-to-one Management of Financial Services (MFS) agent mentorship programme that focuses on vulnerable populations and teaches them the fundamentals of mobile and online interaction is possible. Additionally, removing the barriers to financial service access for low-income persons by reducing transaction costs could facilitate increased participation, as observed in Nepal, where free and easily accessible accounts were more prevalent among women


  • The digital divide affects every area of life, including literacy, wellness, mobility, security, access to financial services, etc. Therefore, for a fast-growing nation such as India, the focus needs to shift from simple economic growth to equitable and inclusive growth.

Mains Question

Q. What are the challenges to Digital financial inclusion in India? Explain in detail the strategies needed to tackle the financial inclusion?

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