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An overview of the ﬁnancial inclusion policies in India
Aurelie Larquemin 1
Evidence of the importance of ﬁnancial inclusion for economic growth and development are
now well established and documented but little is known about the role institutions and poli-
cies can play and how institutional frameworks can support inclusive ﬁnancial development.
This paper is a case study on India, aiming to present the recent initiatives taken by the
main institutional stakeholders to reach full ﬁnancial inclusion in the country.
1. IFMR LEAD, Policy and Development Fellow, email@example.com
2. The information and views set out in this study are those of the author and do not necessarily reﬂect the oﬃcial
opinion of IFMR-LEAD
1 Introduction 1
2 Financial inclusion, key for growth and development at the country and in-
dividual levels 1
2.1 A growing literature supporting ﬁnancial inclusion to support growth and devel-
opment ......................................... 1
2.2 The Indian context: between impressive progress and persistent challenges . . . . 2
3 The Evolution of the Financial Inclusion Movement in India leading to the
presentation of the global plans in force since 2010: Swabimaan program
(2010-2013) and Pradhan Mantri Jan-Dhan Yojana (PMJDY) 4
4 The Government of India, instigator of the ﬁnancial inclusion eﬀorts 6
4.1 The Government of India has designed several schemes with a ﬁnancial inclusion
objectiveatheart. ................................... 6
4.2 The GoI has also put technology at the center of its initiatives, believing in its
role to foster ﬁnancial inclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.3 An emphasis was put on key sectors like Agriculture and MSME. . . . . . . . . . 9
5 An enabling environment for ﬁnancial inclusion thanks to RBI 9
5.1 RBI is facilitating the ﬁnancial inclusion eﬀorts putting in place favorable regu-
5.2 Recently RBI has announced new initiatives to impulse a new impetus to the
ﬁnancial inclusion movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6 Financial Inclusion Initiatives supported by the National Bank for Agriculture
and Rural Development 14
7 Financial Inclusion Initiatives supported by the Small Industries Development
Bank of India 15
8 Conclusion 16
9 References 17
Literature has long established the positive impact of an eﬃcient and extended ﬁnancial sector
on economic growth and development. Building a ﬁnancially inclusive system that promotes
economic growth is therefore both a priority and a challenge for developing countries. All stake-
holders have a role to play and the construction of an eﬃcient framework serving all segments of
the population, especially the lower-income section, is key. However, there is still a lot to under-
stand about the link between public institutions and the eﬀect of their policies and initiatives on
ﬁnancial inclusion, particularly in the context of developing countries. It is still rather unclear
how institutional frameworks can support inclusive ﬁnancial development and what institutions
and policies are the most relevant for ﬁnancial inclusion.
In India there is a consensus on the importance of ﬁnancial inclusion for the country. The Indian
authorities, no matter their political orientation, have been putting an emphasis on ﬁnancial
inclusion for several years, with an acceleration of their eﬀorts over the last 5 years. Many
initiatives and schemes have been conceived and implemented by diﬀerent public stakeholders.
This paper aims to facilitate the understanding of the past and actual institutional initiatives
towards ﬁnancial inclusion in India.
The paper is organized as follows: Section 1 presents the state of the literature and evidence
on the importance of ﬁnancial inclusion and describes its status in India. Then the following
sections detail the past and recent initiatives of the Indian institutional framework, including
the Government of India (GoI), the Reserve Bank of India (RBI) and the National Bank for
Agriculture and Rural Development (NABARD).
2 Financial inclusion, key for growth and development at the
country and individual levels
2.1 A growing literature supporting ﬁnancial inclusion to support growth
According to Demirg-Kunt et al. (2014) discussing the Global Findex Database 2014, 62% of
adults worldwide have an account at a bank or another type of ﬁnancial institution or with
a mobile money provider, up from 51% in 2011. Between 2011 and 2014, 700 million adults
became account holders while the number of those without an account dropped by 20% to 2
billion. Account penetration diﬀers enormously between high-income and developing countries
in the aggregate: 89% of adults in high-income countries, but only 24% in low-income countries,
report that they have an account at a formal ﬁnancial institution.
For long the positive relationship between ﬁnancial development and growth has been estab-
lished. The accumulating body of evidence supports the assessment that developing inclusive
ﬁnancial systems is an important component for economic and development progress. Financial
markets are supposed to make the match between savers and users and to allocate capital toward
the highest productive usage (e.g., Mankiw and Ball 2011).
In their study Campos and Dercon (2014) sum up the latest ﬁndings on the relationship between
ﬁnance and growth, so far considered as causal and unidirectional from ﬁnance to growth:
(i) The long-run eﬀect of ﬁnance on growth is positive and dominates the short-term eﬀect that
tends to be negative (Kaminsky and Schmukler, 2003; and Loayza and Ranciere, 2006);
(ii) The relationship may be non-linear: beyond a certain threshold (calculated to be above
100% of GDP) ﬁnance is associated with negative growth (Berkes et al. 2012);
(iii) Distribution is important: household credit seems to have little growth payoﬀs, while private
sector credit has large growth payoﬀs (Beck, 2013);
(iv) Financial development reduces income inequality and exerts a disproportionally positive
impact on the bottom quintile;
(v) Diﬀerent ﬁnancial liberalisation policies have contrasting eﬀects on income inequality. Delis
et al. (2013) report that capital stringency and supervisory power regulation lower inequality,
while market discipline and activity restrictions may exacerbate it.
A growing literature shows that ﬁnancial inclusion can have a signiﬁcant positive eﬀect for
individuals. Several studies have demonstrated that the lack of ﬁnancial access can lead to
poverty traps and inequality (Banerjee and Newman, 1993; Galor an Zeira, 1993; Aghion and
Bolton, 1997; Beck Demirg -Kunt and Levine, 2007). Similarly an expanding literature highlights
the positive consequences of access to saving instruments: on savings increase (Aportela, 1999;
Ashraf et al. 2010a), on productive investment (Dupas and Robinson, 2009), on consumption
(Dupas and Robinson, 2009; Ashraf et al., 2010b), and female empowerment (Ashraf et al.,
2010b). Researchers are also looking at the beneﬁcial eﬀects of access to credit and insurance
products (Karlan and Morduch, 2010; Banerjee et al., 2010; Roodman, 2012).
A growing number of randomized evaluations suggests that ﬁnancial services do have a positive
impact on a variety of microeconomic indicators, including self-employment business activities,
household consumption, and well-being (Bauchet et al. 2011), the eﬀects encountered depending
on the ﬁnancial service considered. For instance regarding credit products, two main patterns
stand out: small businesses do beneﬁt from access to credit while the linkage to broader welfare is
less clear (Banerjee, Duﬂo, Glennerster, and Kinnan 2010 and 2013). As per insurance products,
recent randomized evaluations in India and Ghana of weather-based index insurance showed
strong positive impact on farmers because the assurance of better returns encouraged farmers
to shift from subsistence to riskier cash crops (Cole, et al. 2013; Karlan, Osei-Akoto, Osei, and
2.2 The Indian context: between impressive progress and persistent chal-
Growth forecast in Asia and Paciﬁc outperform the rest of the world for 2015 (+5.6%) and 2016
(+5.5%) according to the IMF Regional Economic Outlook. Performance among the countries
will be mixed, with China’s economy slowing down (+6.8% in 2015, +6.3% expected in 2016),
Japan picking up (+1% in 2015, +1.2% expected in 2016) while India’s growth is expected to
rise to 7.2% in 2014/2015 and +7.5% in 2015/2016, driven by stronger investment following
improvements to the business climate, and making it one of the fastest growing economies in the
world. The Indian economy is strengthening, supported by pro-active policy actions, and lower
global oil prices according the latest IMF assessment of the country. The IMF also highlights
that bolstering ﬁnancial sector health and further ﬁnancial inclusion would support growth
going forward. They encourage the authorities to continue to move toward direct cash transfer
payments, helped by India’s unique identiﬁcation system (Aadhaar), to help better targeting of
subsidies (which can have large leakages) toward the vulnerable.
According to the World Bank, high growth during 2004/05 and 2009/10 enabled accelerated
poverty reduction. Compared with the previous decade, the rate of poverty reduction doubled,
with the share of the population living below the poverty line falling from 37.2% in 2004/05
to 29.8% in 2009/10. The poverty headcount rate, measured using the national poverty line,
declined indeed by 1.5 percentage points per year in 2004/05 to 2009/10, double the rate of the
preceding decade. However poverty reduction rate has been lower than what could have been
expected given the Indian economic performances and went along with a rise in inequality, with
the Gini index climbing from 0.27 in rural and 0.35 in urban India in 2004/05 to about 0.28 and
0.37, respectively, in 2009/10.
To ﬁght these disparities, the government put an emphasis on achieving more inclusive growth,
as stated as key objective in the Eleventh Five Year Plan (2007/08 to 2011/12). The Twelfth
Five Year Plan documents describe the objective “of India moving forward in a way that would
ensure a broad-based improvement in living standards of all sections of the people through a
growth process which is faster than in the past, more inclusive and also more environmentally
Over the next 15 years, India’s economy will have to generate jobs for the one hundred million
young Indians who will enter the job market during this period, constituting for India the largest,
and among the youngest, workforces in the world. Important reforms and policies have been
initiated and conducted; however, the country will need to keep implementing reforms, including
policies to stimulate ﬁnancial inclusion especially in the agriculture and MSME sectors, two key
components of the Indian economy3 4.
Financial inclusion has expended in India over the past years, as indicated by the indicators
collected for the World Bank Global Findex database. Between both implementations of this
survey in 2011 and 2014, 53% of adults are reported to have a bank account, which is a sharp
increase from 35% in 2011. The banking penetration has drastically increased in rural areas
between 2011 and 2014 with 50% in 2014 against 33% in 2011.
However these good numbers have to be balanced with some less positive facts identiﬁed also in
this database. There is still a long way to go in the attempt to target ﬁnancial inclusion eﬀorts
towards the poorest section of the Indian population. Among the 40% poorest population, 56%
of the adults (15+) are unbanked, compared to 41% of the adults belonging to the “richest
60%”. Usage of bank accounts is also an issue that deserves more attention. 43% of account
holders did not make any deposits or withdrawals in their bank accounts in the past year. 67%
of account holders reported of not making a single deposit in any typical month.
Table 1: Pradhan Mantri Jan - Dhan Yojana (Accounts opened as on 01.07.2015,
Figures in millions)
Number Of Accounts No Of Rupay
% of Zero Bal-
Rural Urban Total
Public Sector Bank 70.7 58.7 129.4 120.4 51.7
Rural Regional Bank 25.1 4.4 29.5 21.2 51.53
Private Banks 4 2.8 6.8 6.1 48.53
Total 99.8 65.8 165.7 147.7 51.48
Source: GoI PMJDY Progress Report
Other dimensions of ﬁnancial inclusion remain to be improved. Informal borrowing is still an
important issue: 13% adults (% age 15+) borrowed from money lenders; and 32% from friends
3. Agriculture plays a vital role in the Indian economy with more than 70% of the rural households depending on
agriculture as their principal means of livelihood. India is the second largest agricultural land with 157.35 million
hectares. The GDP of agriculture and allied sectors in India was recorded at US$156.1 billion in 2014 with a
growth of 3.6%.
4. The micro, small and medium enterprises constitute another pillar of the Indian growth. According to the report
from the Indian Ministry of MSMEs “MSMEs at a glance” Indian SME sector contributes to 45% of the industrial
output, 40% of the country’s total exports, employs over 60 million people, creates 1.3 million jobs every year
and produces more than 8,000 quality products for the domestic and international markets. There are around 30
million MSME is Indian and the sector will welcome 12 million workers in the next 3 years and the sector to grow
at 8% per year.
and relatives. More women have access to ﬁnancial services today however the gender gap is
increasing: it was of 18 points in 2011 (44% male and 26% female with bank accounts), while
there is a 19 points diﬀerence in 2014 (62% male and 43% female with bank accounts). Cash
transactions are still the rule in India, despite the development of credit/debit cards, mobile
phone banking, ATMs, etc. Only 20% of adults (% age 15+) reported to have debit cards, and
4% credit cards, and only 11% adults used their debit cards in the previous year.
All types of bills or fees are mostly paid in cash. For example, among the 22% of adults who
have to pay school fees, 99% paid in cash (6% reported of using a bank account as well). Among
the 19% of adults (15+) who received wages in the past year, 86% received wages in cash.
Moreover Payment System (IMPS) has been launched, but only 2% adults have mobile accounts
(58% of adults in Kenya have mobile accounts). Among the bank account holders, only 6%
had ever made any kind of transaction from an account at a ﬁnancial institution using a mobile
phone. There is a huge scope for digitalization of ﬁnancial services and bank transfers, including
government subsidies, wages, etc.
Taking into account the status of ﬁnancial inclusion indicators in India and the need for a strong
political will for improvement, the Indian institutions have conceived successive plans to tackle
3 The Evolution of the Financial Inclusion Movement in India
leading to the presentation of the global plans in force since
2010: Swabimaan program (2010-2013) and Pradhan Mantri
Jan-Dhan Yojana (PMJDY)
Credit and saving tools had long existed in India, created and run by the poor for the poor, like
the chit fund mechanism, before ﬁnancial inclusion became a political priority. Early initiatives
were launched in the mid-70s by NABARD with the creation of Regional Rural Banks. Nowadays
the main actors of the ﬁnancial inclusion policy are the Government of India (GoI) and the
Reserve Bank of India (RBI). The initial eﬀorts were focused on making cheap credit products
available to poor households for asset creation, with the formal banking system as a close partner
and channel of distribution.
In the 1990s the microﬁnance revolution took place in the country and helped open the credit
market to remote areas and show that it was possible for microﬁnance institutions (MFI) to serve
the poor and be proﬁtable. Early-on it was recognized by the Indian authorities that ﬁnancial
inclusion alone will not be enough for development, to ﬁght against poverty and vulnerability
and to support economic security and visible livelihoods. Several committees were called and
reports issued to deﬁne ﬁnancial inclusion and the goals for India in this matter, and both
evolved over time.
In 2008 the Rangarajan Committee stated that “the essence of ﬁnancial inclusion is in trying to
ensure that a range of appropriate ﬁnancial services is available to every individual and enabling
them to understand and access those services”. In 2014 the RBI Governor Raghuram Rajan
declared that ﬁnancial inclusion was about (i) “the broadening of ﬁnancial services to those
who do not have access to ﬁnancial services, (ii) the deepening of ﬁnancial services for people
who have minimal ﬁnancial services and (iii) greater ﬁnancial literacy and consumer protection”.
Following the evolution of the ﬁnancial inclusion concept and understanding, the Indian strategy
has similarly evolved. From 2010 to 2013 the Government of India had initiated the Swabimaan
program. In 2013 a new scheme, called Pradhan Mantri Jan-Dhan Yojana has been launched
by the new administration in place.
The diﬀerences in the two approaches are summarized in the table 2 below.
Table 2: Swabimaan and PMJDY programs’ approaches
Earlier approach: Swabimaan program New approach: PMJDY
Villages with population greater than
2000 covered, thus limited geographical
Focus on household
Only rural Both rural and urban
Bank Mitr (Business Correspondent) was
visiting on ﬁxed days only
Fixed point Bank Mitr (BC) in each SA
(3 to 4 villages on average) to visit other
villages in the SSA on ﬁxed days SA com-
prising of 1000-1500 households
Oﬄine accounts opening-technology lock-
in with the vendor
Only online accounts in CBS of bank
Focus on account opening and large num-
ber of accounts remained dormant
Account opening to be integrated with
DBT, credit, insurance and pension
Inter-operability of accounts was not there Inter-operability through RuPay Debit
card, AEPS, etc.
No use of mobile banking Mobile Wallet and USSD-based mobile
banking to be utilized
Cumbersome KYC formalities Simpliﬁed KYC/e-KYC in lace as per RBI
No guidelines on the remuneration of the
Bank Mitr (BCs). Banks went generally
with Corporate BCs who used to be least
expensive to them
Minimum remuneration of the Bank Mitr
(BC) to be Rs 5000 (ﬁxed +variable) with
structured monitoring mechanism at cen-
tre, state and district levels.
A recent RBI survey ﬁnds that 47% of
Bank Mitr are untraceable
Viability and sustainability of Bank Mitr
(BC) is identiﬁed as a critical component
Monitoring left to banks Financial inclusion campaign in Mission
Financial literacy has no focus The rural branches of banks to have a ded-
icated Financial Literacy Cell
No active involvement of states/districts State-level and district level monitoring
committees to be set-up
No brand visibility of the program and
Bank Mitr (BC)
Brand visibility for the program and Bank
Mitr (BC) proposed
Providing credit facilities was not encour-
OD limit after satisfactory opera-
tions/credit history of 6 months
No grievance redressal mechanism Grievance redressal at SLBC level in re-
Source: Nair T. and A. Tankha (2012)
The PMJDY aims to ensure access to various ﬁnancial services like basic savings account, need-
based credit, remittances facility, insurance and pension to the lower-income groups. According
to the GoI, the results obtained by the ﬁrst phase of the Swabhimaan plan were disappointing:
while banks had achieved their targets, it had limited reach and impact. It is estimated that 75
million households were still excluded from formal ﬁnancial services, 60 million in rural areas
and 15 million in urban zones. The ﬁnancial inclusion policy of the new PMJDY program has
then been conceived and is based on six objectives that are scheduled to be achieved in two
Phase I (15 August 2014 - 14 August 2015)
1. Universal access to banking facilities (within 5km distance of each village);
2. Providing basic banking accounts for saving and remittance and RuPay Debit Card with
in-built accident insurance cover of Rs. 100,000;
3. Financial Literacy Program
Phase II (15 August 2015 - 15 August 2018)
4. Overdraft facility of up to Rs. 5000 after 6 months of satisfactory performance of sav-
ing/credit history (a credit guarantee fund would be created for coverage of defaults in
6. Unorganized sector pension schemes like Swalamban.
To achieve these targets the Indian authorities rely on previous initiatives towards ﬁnancial
inclusion and new ones conceived under this new scheme. All stakeholders are involved in the
process of improving and deepening ﬁnancial inclusion.
4 The Government of India, instigator of the ﬁnancial inclusion
The Government of India has been the central actor in the ﬁnancial inclusion initiative, which
has remained at the center of the public priorities despite the change of government and of
4.1 The Government of India has designed several schemes with a ﬁnancial
inclusion objective at heart.
This is the case of instance with the national pension scheme (NPS): in 2004, the GoI
decided to move from a deﬁned-beneﬁt pension system to a deﬁned-contribution pension system.
Apart from oﬀering a range of investment options to employees, the scheme allows individuals
to make decisions about where their pension fund is invested, permits limited withdrawal prior
to retirement and reduces the total pension liabilities of the Government of India. Initially, NPS
was introduced for the new government recruits (except armed forces). With eﬀect from May
1st, 2009, NPS has been provided for all citizens of the country including the unorganized sector
workers on voluntary basis. The pension scheme is administered on behalf of the government
by the Pension Fund Regulatory and Development Authority (PFRDA).
Other schemes launched by the GoI include:
(i) Swavalamban scheme launched in October 2010 and closed in May 2015 (replaced by Atal
pension Yojana scheme on June 1st 2015) was the unorganized sector pension scheme, thought
to address the old age income protection need of unorganized/informal sector workers which
represent 85% of the working population;
(ii) Swarnajayanti Gram Swarojgar Yojana (SGSY), launched in December 1999 was a
centrally sponsored scheme that followed the mechanism of forming SHGs of rural poor house-
holds, providing capacity building training and linking groups to bank. SGSY was formed from
a merger and restructuring of the Integrated Rural Development Program (IRDP) and allied
skills generation programs, namely Training for Rural Youth for Self Employment (TRYSEM),
Development of Women and Children in Rural Areas (DWRCA), Supply of Toolkits in Rural
Areas (SITRA), Ganga Kalyan Yojana (GKY) and Million Wells Scheme (MWS);
(iii) National Rural Livelihood Mission (NRLM) launched in June 2010 by the Ministry of
Rural Development expanding nationwide the poverty alleviation program Indira Kranti Patham
to take over from the SGSY scheme. With the support of international institutions like the World
Bank, this scheme combines handholding, training and capacity building and credit linkage.
The handholding component includes external (dedicated professional institutions at the State,
district and sub-district levels) and internal support in the form of SHG federations at the village
level, and block level and later on at district level.
(iv) Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS),
enacted as an Act in the Parliament in September 2005, aims to enhance the livelihood of the
rural people by guaranteeing at least one hundred days of wage employment in a ﬁnancial year
to a rural household whose adult members volunteer to do unskilled manual work. The primary
objective of the Scheme is to augment the wage employment and the auxiliary objective is to
strengthen natural resource management through works that address causes of chronic poverty
like drought, deforestation, soil erosion, etc., and thus encourage sustainable development.
(v) Aadhaar Unique Identiﬁcation Authority in India (UIDAI), is an initiative to
provide an individual identiﬁcation number to every citizen of India which will serve as a proof
of identity and address, anywhere in India and enable people to have access to services such as
banking, mobile phone connections and other government and non-government schemes. The
UIDAI was created through a notiﬁcation issued by the Government in January 2009. Phase
II of the program has commenced with an allocation of more than 30 billion rupees in July
2010 for enrolling 100 million residents through multiple registrars. Biometrics would prevent
multiple enrolments by the same individual (a problem for many existing service programs),
while providing nearly foolproof identity authentication.
(vi) Credit Guarantee Fund Trust for Micro and Small Enterprises, created in 2000
(initially called Credit Guarantee Fund Scheme for Small Industries (CGFSI) and renamed in
2006) aims to guarantee the availability of bank credit to MSMEs by reassuring the lender that,
in the event of a MSE unit (which availed collateral free credit facilities) failing to discharge its
liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender
up to 85% of the credit facility. The scheme is open to new as well as existing Micro and Small
Enterprises, with a maximum credit cap of Rs. 10 million.
(vii) The Jan-Suraksha scheme was announced in February 2015 by Finance Minister and
launched in May by Prime Minister. It involves the creation of a universal social security system
for all Indians, especially the poor and under-privileged through three key parts: Pradhan
Mantri Suraksha Bima Yojana (accident insurance), Prahan Mantri Jeevaan Jyoti
Bima Yojana (life insurance) and Atal pension Yojana (pension scheme).
4.2 The GoI has also put technology at the center of its initiatives, believing
in its role to foster ﬁnancial inclusion.
For instance the PMJDY scheme includes a USSD-based mobile banking service, launched
in August 2014, through the gateway provided through National Payments Commission of India
(NPCI) to banks, following a recommendation from the Technical Committee on mobile banking.
Similarly, Immediate Payment Service (IMPS) was launched by the National Payments
Corporation of India (NPCI) in November 2010. The NPCI has facilitated inter-bank mobile
banking payment enabling real time transfer of funds between bank accounts and providing a
centralized inter-bank settlement service for mobile banking transactions.
Micro ATMs have been rolled out over the country, with the ﬁrst ATM installed in India
in 1987. Several initiatives were led to enhance the ATM technology. A recent innovation is
the National Financial Swift (NFS) operated by NPCI that facilitates routing of ATM
transactions through interconnectivity between the bank’s switches, allowing the customers to
use any ATM of a connected bank.
RuPay Cards, launched by NPCI in March 2012, is a new card payment scheme at a lower cost
and allowing for more ﬂexibility, customizable to the client needs and including protection of
consumer’s information principles and options for electronic products. It aims to be an eﬃcient
domestic alternative to international product facilitators such as MasterCard and Visa and to
enable Indian banks and ﬁnancial institutions to oﬀer electronic payments.
The Aadhaar-enabled payment systems (AEPS) is now a banking product allowing on-
line inter-operable ﬁnancial inclusion transactions at the micro ATM or kiosk banking through
Business Correspondents. The transactions include withdrawals and deposits along with funds
transfers between Aadhaar-enabled card holders.
The Aadhaar Payments Bridge System (APBS) enables the transfer of payments from
government to Aadhaar-enabled accounts of beneﬁciaries at banks and post oﬃces.
Direct Beneﬁt Transfers (DBT) program: In January 2013, the GoI launched the DBT
program to transform service delivery in India by transferring government beneﬁts and subsidies
directly into the hands of residents through the biometric based identiﬁcation system (Aadhaar),
speeding up payments, removing leakages and intermediaries, and enhancing ﬁnancial inclusion.
This program is run through the AEP and APB systems.
The DBT initiative includes 35 schemes and among them the PaHaL (Pratyasksh Hanstantrit
Labh) program: a Direct Beneﬁt Transfer for liqueﬁed petroleum gas (LPG) program. This
scheme stimulates bank account opening by linking Aadhaar numbers to an active bank account,
a suggested condition to beneﬁt from this government program.
The DBTL scheme was launched earlier on June 1st 2013 and covered 291 districts. It required
the consumer to mandatorily have an Aadhaar number for availing LPG Subsidy. The govern-
ment has reviewed the scheme and after examining the diﬃculties faced by the consumer and
modiﬁed the scheme prior to launch, giving the possibility for the consumer to directly receive
subsidy in his bank account without the use of an Aadhaar number. The modiﬁed scheme was
re-launched in 54 districts on November 15th 2014 in the 1st Phase and in the rest of the country
on January 1st 2015.
4.3 An emphasis was put on key sectors like Agriculture and MSME.
Recognizing the importance of the agriculture Sector, the Government has issued a series of
reforms and schemes to stimulate the sector. These initiatives include (i) enhanced institutional
credit to farmers; (ii) promotion of scientiﬁc warehousing infrastructure; (iii) improved access to
irrigation through Pradhan Mantri Krishi Sichayee Yojana; (iv) provision of Price Stabilization
Fund to mitigate price volatility in agricultural products; etc. They are supposed to generate
a continuing growth in the sector over the coming years, thanks to increased investments in
infrastructure, reduced transaction costs, ﬁscal incentives, etc. Given the importance of the
sector for the Indian economy, it is crucial to monitor initiatives, their outcomes and the trends
in the agricultural sector.
To support and reinforce this dynamic the Government has put in places several schemes, for
(i) Prime Minister Employment Generation Program (PMEGP), a “credit linked
Scheme to facilitate participation of ﬁnancial institutions for higher credit ﬂow to micro sec-
(ii) ASPIRE, “to promote Innovation & Rural Entrepreneurship through rural livelihood in-
cubator and technology business incubator”;
(iii) Scheme of Fund for Regeneration of Traditional Industries (SFURTI) to “make
traditional Industries more productive and competitive by organizing the traditional Industries
and artisans into clusters” ;
(iv) Performance & Credit Rating Scheme, “to create an eco-system of MSEs for easier
and cheaper access to credit for the rated enterprises”;
(v) Assistance to Training Institution, “to promote entrepreneurship and skill development
through capital grant for creation and strengthening of infrastructure and program support for
conducting entrepreneurship development and skill development programs”; etc.
These initiatives and the MSMEs sector as a whole will be a key tool to attain more inclusive
growth and poverty reduction, hence it has to be carefully studied.
5 An enabling environment for ﬁnancial inclusion thanks to RBI
Being proactive and supportive vis-a-vis the ﬁnancial inclusion movement, RBI has launched
several policies allowing banks and ﬁnance institutions to come up with innovative products.
5.1 RBI is facilitating the ﬁnancial inclusion eﬀorts putting in place favorable
The Priority Sector Lending initiative was established by RBI to ensure that those sectors
of the economy, which may not get timely and adequate credit in the absence of this special
dispensation, have access to credit tools from Indian banks. The list of sectors has been revised
in April 2015 and includes agriculture, micro and small enterprises, education, housing, export
credit, etc. New sectors like renewable energy and social infrastructure have been added too and
the new norms require banks to ensure that 8% of their loans go to small and marginal farmers.
RBI has relaxed a number of norms and requested documents to open a bank account by people
who plan to keep a balance lower than Rs 50.000 and whose total credit in all the accounts
together will not exceed Rs 100.000 in a year (simpliﬁed KYC form, June 2014). Similarly a
simpliﬁed bank saving account opening has been put in place and RBI has permitted banks to
open branches without taking authorization in tier 3 to 6 cities, towns and villages. RBI also
asked banks to provide all the material related to opening accounts, disclosures, etc. in the
regional languages. Banks were permitted in 2006 to partner with other rural organizations,
like NGOs, SHGs, MFIs, etc., while RBI reinforced self-regulation in the microﬁnance sector,
appointing Sa-dhan and MFIN as self-regulation organizations.
No-Frills Accounts/Basic Savings Bank Deposit Accounts: In 2005, RBI introduced the
concept of No-Frills Account, now renamed Basic Savings Bank Deposit Accounts (BSBDAs) 5
, targeting the poor and allowing banks to open accounts with zero balance or very minimum
balance requirements. In 2012, RBI has issued new guidelines for the BSDBA including the
•No requirement of any minimum balance;
•Services available include deposit and withdrawal of cash at bank branch as well as free
ATMs-cum-Debit Card; receipt/credit of money through electronic payment channels or
by means of deposit/collection of cheques drawn by Central/State Government agencies
•No limit on the number of deposits that can be made in a month, maximum of four
withdrawals in a month, including ATM withdrawals;
•No charge levied for non-operation/activation of in-operative BSBD Account;
•BSBDA guidelines applicable to all scheduled commercial banks in India including foreign
banks having braches in India.
Banks have also been advised to provide overdraft (OD) facility in saving account and also Small
Overdrafts in No-frills accounts. The Kisan Credit Cards scheme allows banks to issue smart
cards to farmers for providing timely credit support from single window banking system for their
farming needs. It was introduced by the GoI, RBI and NABARD in 1998. In 2005 RBI issued
guidelines to banks to provide General Purpose Credit Card (GCC) which facilitate credit
up to Rs.25000/- without any collateral requirement for rural and semi-urban people based on
assessment of household cash ﬂows.
Business Facilitator/Business Correspondents. The Business Facilitator (BF)/Business
Correspondent (BC) was another innovation, initially created by banks and then supported by
RBI policy. The BC/BF model is a model based on information and communication technology
(ICT): intermediaries or BC/BFs are technologically empowered by the banks to provide the
last mile delivery of ﬁnancial products and services. RBI issued the ﬁrst guidelines for business
correspondents for banks in January 2006. In November 2009, RBI requested banks to prepare
a road-map to provide banking services in every village with a population of more than 2000
inhabitants, by March 2013. It was speciﬁed that these services could be delivered through a
traditional brick-and-mortar branch but also using various forms of branchless banking, including
Business Correspondents. The list of eligible entities to act as BCs has been regularly extended
by RBI and today the sector presents an abundance of models and types of BC structures and
agencies involving diﬀerent roles and functions.
Technology-based innovations. Thanks to an enabling environment, banks and other ﬁnan-
cial institutions have been in constant search and development of economically viable channels
5. Part of the renaming of this account is due to the fact that the “no-frill” nomenclature has become a stigma.
and methods to reach the last mile user of ﬁnancial services. With many of this model failing
or experiencing diﬃculties to be viable, the role of technology has been brought forward as a
key factor for economically viable ﬁnancial inclusion. After ATMs being installed from 1987,
internet banking appeared in India in 1997.
Over the past 10 years electronic payments received a big push with the development of a
retail electronic payment system comprising of Electronic Clearing Service (ECS), National
Electronic Fund Transfer (NEFT), Pre-paid Payment System (PPI), and Point of Sales (POS)
Terminals/online transactions. Today banks are tying up partnerships with telecommunication
companies to provide banking and ﬁnancial services through mobile, which has, with other
digital banking tools, an important potential in terms of ﬁnancial inclusion, especially in remote
areas and isolated and poor population.
Financial literacy approach. RBI is also in harmony with the GoI when it comes to put for-
ward the importance of ﬁnancial literacy for the success of all other ﬁnancial inclusion initiatives.
For instance in 2012 RBI issued guidelines for the Financial Literacy Centers initiative, based
on the recommendations from the Working Group to Examine the Procedures and Processes of
Agricultural Loans, appointed by the Reserve Bank. In its report (April 2007) the Group rec-
ommended that banks should actively consider opening counselling centers, either individually
or with pooled resources, for credit and technological counselling. The broad objective of the
FLCCs is to provide free ﬁnancial literacy/education and credit counseling, with a special focus
on the rural areas, but should not, however, act as investment advice centers.
The speciﬁc objectives of the FLCCs are:
•To educate the people in rural and urban areas with regard to various ﬁnancial products
and services available from the formal ﬁnancial sector;
•To make the people aware of the advantages of being connected with the formal ﬁnancial
•To provide face-to-face ﬁnancial counselling services, including education on responsible
borrowing and oﬀering debt counselling to individuals who are indebted to formal and/or
informal ﬁnancial sectors;
•To formulate debt restructuring plans for borrowers in distress and recommend the same
to formal ﬁnancial institutions, including cooperatives, for consideration;
•To take up any such activity that promotes ﬁnancial literacy, awareness of the banking
products, ﬁnancial planning and amelioration of debt-related distress of an individual;
•To take up any other activity that facilitates the above.
Figure 1: RBI recent initiatives in favor of ﬁnancial inclusion
5.2 Recently RBI has announced new initiatives to impulse a new impetus
to the ﬁnancial inclusion movement
Among RBI latest initiatives, on November 27th 2014 were issued the ﬁnal guidelines for compa-
nies seeking to set up payments banks and small ﬁnance banks in a bid to expand banking
services to more people and small businesses.
The objective of setting up small ﬁnance banks (SFB) is to extend ﬁnancial inclusion by provision
of savings vehicles and supply of credit to small business units, small and marginal farmers,
micro and small industries and other unorganized sector entities, through high technology-low
Some of the relevant guidelines for SFB regarding ﬁnancial inclusion are listed below:
•It aims to provide a whole suite of basic banking products deposits, credit, but in a
limited area of operation.
•Loans and advances of up to Rs. 2,500,000 primarily to micro enterprises, should consti-
tute at least 50% of the loan portfolio; this could make more sense for MFIs who want to
grow faster because the ticket sizes can get bigger.
•For the ﬁrst three years, 25% of branches should be in unbanked rural areas.
•The small ﬁnance banks will be required to extend 75% of its adjusted net bank credit
(ANBC) to the sectors eligible for classiﬁcation as priority sector lending (PSL) by RBI.
Payments banks would be able to accept demand deposits with a cap of 100,000 rupees per indi-
vidual customer. They can issue ATM/debit cards but not credit cards. They can also provide
payments and remittance services through various channels and become business correspondent
of another bank. Moreover, they can distribute non-risk sharing simple ﬁnancial products like
mutual fund units and insurance products, etc. Their objective is to increase ﬁnancial inclu-
sion by providing small savings accounts, payment/remittance services to migrant labor, low
income households, small businesses, other unorganized sector entities and other users by en-
abling high volume-low value transactions in deposits and payments/remittance services in a
secured technology-driven environment.
In February 2015, RBI has received 72 applications for small ﬁnance banks and 41 for payments
banks. On August 19th, 2015, the Reserve Bank of India decided to grant “in-principle” approval
to 11 applicants to set up payments banks under the Guidelines for Licensing of Payments Banks
issued on November 27, 2014.
The Micro Units Development Reﬁnance Agency (MUDRA) Bank, is also a major
recent development in the land of ﬁnancial inclusion. The Bank will start as a department of the
Small Industries Development Bank of India (SIDBI), and is conceived to facilitate the adoption
of responsible ﬁnance principles by all lenders and in-turn help prevent issues of overleveraging
of borrowers, and become a prominent source of funding and liquidity to Non-Banking Finance
Companies- Microﬁnance Institutions (NBFC-MFIs) and other players in the sector.
The MUDRA bank would primarily be responsible for:
•Laying down policy guidelines for micro enterprise ﬁnancing business;
•Registration of MFI entities;
•Supervision of MFI entities;
•Accreditation /rating of MFI entities;
•Laying down responsible ﬁnancing practices to ward oﬀ over indebtedness and ensure
proper client protection principles and methods of recovery;
•Development of standardized set of covenants governing last mile lending to micro enter-
•Promoting right technology solutions for the last mile;
•Formulating and running a Credit Guarantee scheme for providing guarantees to the
loans/portfolios which are being extended to micro enterprises;
•Supporting development & promotional activities in the sector;
•Creating a good architecture of Last Mile Credit Delivery to micro businesses under the
scheme of Pradhan Mantri MUDRA Yojana.
The Reserve Bank of India intends to remain a driving force for ﬁnancial inclusion in India. On
July 15th, 2015 RBI announced the constitution of a Committee with the objective of working
out a medium-term (ﬁve year) measurable action plan for ﬁnancial inclusion.
As per RBI’s publication, the key tasks of the Committee will be:
(i) To review the existing policy of ﬁnancial inclusion including supportive payment system and
customer protection framework taking into account the recommendations made by various com-
mittees set up earlier.
(ii) To study cross country experiences in ﬁnancial inclusion to identify key learnings, particularly
in the area of technology-based delivery models, that could inform our policies and practices.
(iii) To articulate the underlying policy and institutional framework, also covering consumer
protection and ﬁnancial literacy, as well as delivery mechanism of ﬁnancial inclusion encompass-
ing both households and small businesses, with particular emphasis on rural inclusion including
group-based credit delivery mechanisms.
(iv) To suggest a monitorable medium-term action plan for ﬁnancial inclusion in terms of its
various components like payments, deposit, credit, social security transfers, pension and insur-
6 Financial Inclusion Initiatives supported by the National Bank
for Agriculture and Rural Development
The National Bank for Agriculture and Rural Development (NABARD) has also played an im-
portant role and is still fully involved in the ﬁnancial inclusion movement. Among the initiatives
led by NABARD can be mentioned the SHG-Bank Led Program. Recently updated guide-
lines “SHG 2” have been published by NABARD, including innovations meant to resolve the
issues identiﬁed under the previous scheme:
•Inadequate outreach in many regions;
•Delays in opening of SHG accounts and disbursement of loans;
•Impounding of savings by banks as collateral;
•Non-approval of repeat loans even when the ﬁrst loans were repaid promptly;
•Multiple membership and borrowings by SHG members within and outside SHGs;
•Limited banker interface and monitoring.
According to NABARD the model promoted by the SHG 2 guidelines focuses “on voluntary
savings, cash credit as a preferred mode of lending, scope for multiple borrowings by SHG
members in keeping with repaying capacity, avenues to meet higher credit requirements for
livelihood creation, SHG Federations as non-ﬁnancial intermediary, rating and audit of SHGs as
part of risk mitigation system and strengthening monitoring mechanisms”.
The Women Self Help Group Scheme was proposed in the national budget 2011-2012. It is
implemented across 150 backward districts of the country. The Scheme aims to have Self Help
Promoting Institutes (SHPI) promoting and enabling credit linkage of these groups with banks,
but also serving as a banking/business facilitator (including tracking, monitoring these groups
and being responsible for loan repayments). It is managed by NABARD through two of its
major microﬁnance funds, namely Financial Inclusion Fund (FIF) and the Financial Inclusion
Technology Fund (FITF), created following the recommendations of the report of the 2008
Rangarajan Committee on Financial Inclusion.
Digitalize Self-Help Groups, the Eshakti Initiative. Keeping in view the Government of India’s
mission for creating a digital India, NABARD launched a pilot project for the digitisation of
all SHGs in 10 districts across 10 states of the country. To begin with, 2 districts Ramgarh
(Jharkhand) and Dhule (Maharashtra) are being covered during the year 2014-15. The pilot is
to be executed over a 2 years’ period and is expected to cover 75,000 SHGs (1.1 million poor
The objective of this initiative is to support the GoI’s eﬀorts towards ﬁnancial inclusion,
(i) integrating SHG members with the national Financial Inclusion agenda;
(ii) improving the quality of interface between SHG members and Banks,
(iii) facilitate convergence of delivery system with SHGs using the Aadhaar system and
(iv) uplift the economic level of the SHG members, mostly poor rural women.
Among the beneﬁts expected from this program is to bring SHG members on the digitalized
Financial Inclusion map, enabling them to have access to wider range of ﬁnancial services. The
digitization of SHG accounts is expecting to increase bankers’ comfort in credit appraisal and
linkage of SHGs with an automatic and accurate rating of SHGs being available online. The
initiative is allowing mapping of persons not covered under Aadhaar platform and bringing them
under Aadhaar fold. This should then ease the transfer of social beneﬁts and Direct Beneﬁt
Transfer (DBT) through Aadhaar linked accounts and convergence with other Government ben-
eﬁts. The data collected should help in identifying suitable interventions and support for proper
nurturing and strengthening of SHGs.
Information captured include (i) Member Level data (Name, address, gender, marital status,
physically challenged status, Aadhaar details, Voter ID card details, mobile number, BPL/APL
status, membership of Joint Liability Group (JLG), house type, availability of toilets, electricity
connection and other ﬁnancial details like saving bank account number, savings, borrowing &
repayment, life/ medical insurance, micro pension policy), (ii) SHG level data (Name, address,
date of formation, name of SHPI/NGO, name of supporting programme, saving habits, lending
policy, bank linkage, details of periodic savings collected and internal lending, utilization of
bank credit availed for members, and (iii) Output and MIS (Member wise details of SHGs
about regular savings, lending and attendance, Financial Statement of SHGs Balance Sheet
and Proﬁt & Loss account, Rating report, Audit report, Bank linkage details savings and credit
7 Financial Inclusion Initiatives supported by the Small Indus-
tries Development Bank of India
The Small Industries Development Bank of India (SIDBI) is also putting the ﬁnancial inclusion
as a key element of its initiatives in favor of Indian SMEs. Several schemes can be cited:
(i) Service Sector Assistance, “for Existing Small and Medium Service Sector Enterprises in
need of Loan/Capital for Growth, and Existing promoters with experience in the similar activity
for setting up new projects”;
(ii) Flexible Assistance For Capital Expenditure, dedicated to “Existing MSME planning
to Modernize, Upgrade Technology, Diversify by making large Investments in land/ building”;
(iii) Receivable Finance Scheme, “to mitigate the receivables problem of suppliers belonging
to Micro, Small and Medium Enterprises (MSMEs) and improve their cash ﬂow/liquidity”;
(iv) Loan Facilitation & Syndication Services for Entrepreneurs, under this initiative,
SIDBI “facilitates Bank loans for new as well as existing manufacturing and service sector units”;
(v) Growth Capital & Equity Assistance, provides assistance in form of Mezzanine/Convertible
Instruments, Subordinated debt and Equity (in deserving cases) to small and medium business
in need of capital for growth;
(vi) Government Subsidy Schemes, to help MSMEs adopt modern technological processes
and undertake capacity expansion; etc.
The GoI and all the actors of the ﬁnancial sector need to take into account all aspects of ﬁnancial
inclusion. The increase of the number of accounts is not suﬃcient as a worrying proportion of
them is dormant. Coordination should be improved among public and private actors, the latter
being fully integrated in national schemes and policies. The depth of the ﬁnancial sector should
also be a matter of attention, as well as the sustainability of the ﬁnancial inclusion results
obtained so far. It is important to know if they rely only on the special schemes and measures
implemented or if they will remain at this level overtime, or even progress further.
Indian authorities and ﬁnancial inclusion actors lack measurement and knowledge of the out-
comes and impact of the past and actual initiatives toward ﬁnancial inclusion. It is commonly
acknowledge than the shift in the ﬁnancial inclusion eﬀorts, as summarized in the Pradhan
Mantri Jan-Dhan Yojana (PMJDY) policie and recent schemes like the DBT program, are a
move in the right direction. However evidence are lacking to establish correlation or causality
between speciﬁc policies and the ﬁnancial situation in India, and to design the next phases of the
ﬁnancial inclusion eﬀorts. An ambitious program of evaluation of these policies would highlight
success and failures and help shape the next steps of ﬁnancial inclusion support.
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