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Financial Inclusion: Challenges And Opportunities
ASHU GUPTA
ASSISTANT PROFESSOR AT GVM GIRLS COLLEGE, SONIPAT
ABSTRACT
Financial inclusion is the pursuit of making financial services accessible at affordable costs to
all individuals and businesses. Financial inclusion strives to address and offer solutions to the
constraints that exclude people from participating in the financial sector. In 2016, the World
Bank stated that around 2 billion people worldwide don’t use formal financial services and
more than 50% of adults in the poorest households are unbanked. With the help of financial
inclusion concept, by saving small amounts over time, poor people can arrange funding for
the lump investment needed in businesses like for purchasing equipments or buying goods at
a wholesale price. Financial inclusion promotes thrift and develops culture of saving,
improves access to credit both entrepreneurial. Financial Inclusion plays a major role in
inclusive growth of the country. The main objective of this paper is to study the challenges
and opportunities of financial inclusion.
KEYWORDS
Financial Inclusion, challenges, opportunities
INTRODUCTION
In India, where nearly one-fourth of population is illiterate and below the poverty line,
ensuring financial inclusion is a challenge. The two indicators, poverty and illiteracy, vary
widely among different States of India. Rural poverty is above 30 per cent of population in
places such as Assam, Bihar, Madhya Pradesh, Uttar Pradesh, Orissa, Jharkhand,
Chhattisgarh, and Manipur. Rural poverty can be attributed to lower farm income, lack of
sustainable livelihood, lack of skills, under employment and unemployment.
LITERATURE REVIEW
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The banking and other formal financial institutions such as post offices and insurance
companies has become essential for an individual to deposit, save, invest and avail financial
services. The banking sector and other financial sectors were providing lots of financial
services for decades. Reference portrayed that due to illiteracy and poverty, the people were
unable to access the financial services provided by the banking and financial services and
banks were not able to provide the products and services required as well. Various steps were
taken by the Government of India (GOI) and the Reserve Bank of India (RBI) to include the
financially excluded regions, so that the people, especially low income groups and
disadvantaged regions can able to access the products and services rendered by financial
institutions
Levine (1997) empirically tested the neo-classical view and finds that countries with larger
banks and more active stock markets grow faster over subsequent decades even after
controlling for many other factors underlying economic growth. Equally important is access
to finance by all segments of the society (Levine 1997, Pande and Burgess 2003).
Finance can also play a positive role in poverty reduction. A well developed financial system
accessible to all reduces information and transaction costs, influence saving rates, investment
decisions, technological innovation, and long-run growth rates (Beck et al. 2009).
Evidences from Binswanger and Khandker (1995) and Pande and Burgess (2003) suggest
that Indian rural branch expansion program significantly lowered rural poverty, and increased
non-agricultural employment. A key objective in development economics is to work out ways
to lift people out of poverty. Access to finance has been seen as a critical factor in enabling
people to transform their production and employment activities and to exit poverty (Aghion
and Bolton 1997, Banerjee 2001, Banerjee and Newman 1993, Pande and Burgess 2003,
Yunus 1999).
In recent years, financial inclusion has assumed public policy relevance. Many countries like
India (Government of India 2008) and the United Kingdom (UK) (2006) and International
organizations like the United Nations (2006), World Bank (2008, 2009) have set up task
force/committees to understand financial inclusion and to improve its scope. These studies
throw light on various aspects of financial inclusion. However, the measurement aspect of
financial inclusion has, so far, not extensively been covered by these reports. For India, being
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a very well diversified economy and society, it is imperative to give adequate attention to
measurement of financial inclusion.
There are few scholars who have attempted to measure some aspects of financial inclusion.
Honohan (2007) estimated the fraction of the adult population using formal financial
intermediaries using the information on number of banking and MFI accounts for more than
160 countries, and then correlated with inequality (Gini Coefficient) and poverty.
Sarma (2008) developed an Index for financial inclusion using aggregate banking variables
like number of account, number of bank branches and total credit and deposit as proportion of
GDP for 55 countries.
Mehrotra et al. (2009) also built up an index for financial inclusion using similar kind of
aggregate indicators like number of rural offices, number of rural deposit accounts, volume of
rural deposit and credit from banking data for sixteen major states of India.
Moreover, World Bank (2008) provides a composite measure of access to financial services,
that is, the percentage of adult population that has an account with a financial intermediary
for 51 countries. While World Bank (2009) in Banking the Poor analyzed the association
between access to banking services, as measured by the number of bank accounts per
thousand adults in each country, and several other factors like transactions offered at banks,
or required by banks, and regulations adopted by country authorities that may affect banking
access for 45 countries.
Beck et al. (2009) discusses about the availability of copious amount of data on many aspects
of the financial system, but systematic indicators of inclusiveness of financial sector are
lacking.
Sadhan Kumar Chattopadhyay in a paper for RBI on Financial Inclusion in India: A case- study of West Bengal (2011), has examined the extent of financial inclusion in West Bengal.
According to the study there has been an improvement in outreach activity in the banking
sector, but the achievement is not significant. An index of financial inclusion has been
developed in the study using data on three dimensions of financial inclusion viz banking
penetration, availability of the banking services and usage of the banking system.
OBJECTIVES
To identify the challenges faced in implementing financial inclusion
