Financial Inclusion in India and Its Challenges

Payment banks


From UPSC perspective, the following things are important :

Prelims level: Payment Banks and Small Finance Bank

Mains level: Paper 3- Challenges in financial inclusion

The article highlights the important role Payment Banks could play in furthering the financial inclusion in India.

Financial inclusion and challenges

  • Interventions, especially the JAM trinity—Jan Dhan accounts, Aadhaar and Mobile phones—have accelerated digital and financial inclusion in India.
  • Four of every five Indian adults have a registered bank account.
  • Financial inclusion is not only about opening accounts, it encompasses access to credit, insurance and micro-investment products in a simple and safe way.
  • This remains a challenge for ‘weaker sections and low-income groups’.
  • For instance, only 16% of micro, small and medium enterprises (MSMEs) have access to formal credit amid an estimated debt demand of 69.3 trillion.

High-technology, low-cost banking to accelerate financial inclusion

  • In 2014, Nachiket Mor committee recommended setting up “high technology—low cost” banking models to accelerate financial inclusion to the last mile.
  • Subsequently, the Reserve Bank of India licensed ‘vertically differentiated banking systems’, such as Payments Bank (PBs) and Small Finance Banks (SFBs).
  • SFBs have grown profitably thanks to the yield spread between deposits and lending.
  • Most of them started off as micro finance institutions with a ready asset base, and after converting into SFBs, they have got a better liability franchise but continue to operate in niche geographies.
  • On the other hand, PBs have shown strong growth in revenues, while operating at a larger scale than SFBs.
  • The high-tech PB model has shown more rigour than the cost-heavy branch-based SFB model in terms of its impact on inclusion.

Need for structural intervention

  • If we intend to make a real move ahead on the inclusion front, PBs will have to play a larger role.
  • However, to realize their full potential, they need certain structural interventions:

1) Liabilities

  • PBs can take deposits only up to 1 lakh, which limits their ability to augment profit that can be further deployed to enhance efficiencies.
  • For a few segments, such as self-help groups and MSMEs, the savings account limit blocks the adoption of highly-accessible bank accounts.
  • Since the model has matured, it would be prudent to enhance the deposit limit to 5 lakh and benchmark it to Deposit Insurance and Credit Guarantee Corporation limits.
  • Banking Correspondents (BCs) are a critical link in driving financial inclusion.
  • PBs could offer low-value and simple fixed or recurring deposit products and sell to consumers through their BC distribution network, thus improving their viability.

2) Assets

  • Currently, there is no national-level lender with the risk appetite for thin-credit consumers.
  • PBs can evolve new micro-lending models through their BC networks and mobile apps and create an alternate credit score for these consumers.
  • Allowing micro-lending by PBs could be a starting point. Thereafter, regulators may consider a transition path for them to become SFBs, or even Universal Banks.

3) Working together for collective impact

  • PBs have an edge in technology and reach, while traditional players have a trust legacy.
  • For collective impact on inclusion, two options can be evaluated with safeguards in place.
  • One, PBs could co-originate loans with traditional institutions so that capital requirements are shared.
  • Two, they can originate credit and allow it to mature, or securitize and turn it into a market-linked instrument.
  • This could accelerate credit formalization.


We must remind ourselves that there is no one-size-fits-all solution to achieve complete financial inclusion for the diversified needs of our people. An enabling framework needs to be in place. Payments Banks, in particular, have the potential to bridge India’s financial inclusion gaps.

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