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Even after 60 years of independence, a large section of Indian population still remain
unbanked. This malaise has led generation of financial instability and pauperism among the
lower income group who do not have access to financial products and services. However, in
the recent years the government and Reserve Bank of India has been pushing the concept
and idea of financial inclusion.
Why Financial Inclusion in India is Important ?
The policy makers have been focusing on financial inclusion of Indian rural and semi-rural
areas primarily for three most important pressing needs:
1. Creating a platform for inculcating the habit to save money – The lower income
category has been living under the constant shadow of financial duress mainly because of
the absence of savings. The absence of savings makes them a vulnerable lot. Presence of
banking services and products aims to provide a critical tool to inculcate the habit to save.
Capital formation in the country is also expected to be boosted once financial inclusion
measures materialize, as people move away from traditional modes of parking their savings
in land, buildings, bullion, etc.
2. Providing formal credit avenues – So far the unbanked population has been vulnerably
dependent of informal channels of credit like family, friends and moneylenders. Availability
of adequate and transparent credit from formal banking channels shall allow the
entrepreneurial spirit of the masses to increase outputs and prosperity in the countryside. A
classic example of what easy and affordable availability of credit can do for the poor is the
micro-finance sector.
3. Plug gaps and leaks in public subsidies and welfare programmes – A considerable
sum of money that is meant for the poorest of poor does not actually reach them. While this
money meanders through large system of government bureaucracy much of it is widely
believed to leak and is unable to reach the intended parties. Government is therefore,
pushing for direct cash transfers to beneficiaries through their bank accounts rather than
subsidizing products and making cash payments. This laudable effort is expected to reduce

government’s subsidy bill (as it shall save that part of the subsidy that is leaked) and
provide relief only to the real beneficiaries. All these efforts require an efficient and
affordable banking system that can reach out to all. Therefore, there has been a push for
financial inclusion.
Why is financial inclusion needed in India? - (A Graphical Representation )
What are the steps taken by RBI to support financial inclusion?
RBI set up the Khan Commission in 2004 to look into financial inclusion and the
recommendations of the commission were incorporated into the mid-term review of the

policy (2005–06) and urged banks to review their existing practices to align them with
the objective of financial inclusion. RBI also exhorted the banks and stressed the need
to make available a basic banking 'no frills' account either with 'NIL' or very minimum
balances as well as charges that would make such accounts accessible to vast sections of
the population
Of the many schemes and programmes pushed forward by RBI the following need special
mention.
A. Initiation of no-frills account – These accounts provide basic facilities of deposit and
withdrawal to accountholders makes banking affordable by cutting down on extra frills that
are no use for the lower section of the society. These accounts are expected to provide a
low-cost mode to access bank accounts. RBI also eased KYC (Know Your customer) norms
for opening of such accounts.
B. Banking service reaches homes through business correspondents – The banking
systems have started to adopt the business correspondent mechanism to facilitate banking
services in those areas where banks are unable to open brick and mortar branches for cost
considerations. Business Correspondents provide affordability and easy accessibility to this
unbanked population. Armed with suitable technology, the business correspondents help in
taking the banks to the doorsteps of rural households.
C. EBT – Electronic Benefits Transfer – To plug the leakages that are present in transfer of
payments through the various levels of bureaucracy, government has begun the procedure
of transferring payment directly to accounts of the beneficiaries. This “human-less” transfer
of payment is expected to provide better benefits and relief to the beneficiaries while
reduc ing government’s c ost of transfer and monitoring. Onc e the benefits starts to ac c rue to

the masses, those who remain unbanked shall start looking to enter the formal financial
sector.
The Reserve Bank of India (RBI) set up the Khan Commission in 2004 to look into financial inclusion
and the recommendations of the commission were incorporated into the mid-term review of the
policy (2005–06). In the report RBI exhorted the banks with a view to achieving greater financial
inclusion to make available a basic "no-frills" banking account. In India, financial inclusion first
featured in 2005, when it was introduced by K.C. Chakraborthy, the chairman of Indian
Bank. Mangalam became the first village in India where all households were provided banking
facilities. Norms were relaxed for people intending to open accounts with annual deposits of less
than Rs. 50,000. General credit cards (GCCs) were issued to the poor and the disadvantaged with a
view to help them access easy credit. In January 2006, the Reserve Bank permitted commercial
banks to make use of the services of non-governmental organizations (NGOs/SHGs), micro-finance
institutions, and other civil society organizations as intermediaries for providing financial and banking
services. These intermediaries could be used as business facilitators or business correspondents by
commercial banks. The bank asked the commercial banks in different regions to start a 100%
financial inclusion campaign on a pilot basis. As a result of the campaign, states or union territories
like Puducherry, Himachal Pradesh and Kerala announced 100% financial inclusion in all their
districts. Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers'
accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and
the low income savings and lack of bank branches in rural areas continue to be a roadblock to
financial inclusion in many states and there is inadequate legal and financial structure.
The government of India recently announced “Pradhan Mantri Jan Dhan Yojna,” [8] a national financial
inclusion mission which aims to provide bank accounts to at least 75 million people by January 26,
2015. To achieve this milestone, it’s important for both service providers and policy makers to have
readily available information outlining gaps in access and interactive tools that help better
understand the context at the district level. MIX designed the FINclusion Lab India FI workbook [9] to
support these actors as they craft strategies to achieve these goals.
In India, RBI has initiated several measures to achieve greater financial inclusion,such as facilitating
no-frills accounts and GCCs for small deposits and credit. Some of these steps are:

Opening of no-frills accounts: Basic banking no-frills account is with nil or very low minimum
balance as well as charges that make such accounts accessible to vast sections of the population.
Banks have been advised to provide small overdrafts in such accounts.
Relaxation on know-your-customer (KYC) norms:KYC requirements for opening bank accounts
were relaxed for small accounts in August 2005, thereby simplifying procedures by stipulating that
introduction by an account holder who has been subjected to the full KYC drill would suffice for
opening such accounts.The banks were also permitted to take any evidence as to the identity and
address of the customer to their satisfaction. It has now been further relaxed to include the letters
issued by the Unique Identification Authority of India containing details of name, address and
Aadhaar number.
Engaging business correspondents (BCs):In January 2006, RBI permitted banks to engage
business facilitators (BFs) and BCs as intermediaries for providing financial and banking ser vices.
The BC model allows banks to provide doorstep delivery of services, especially cash in-cash out
transactions, thus addressing the last-mile problem. The list of eligible individuals and entities that
can be engaged as BCs is being widened from time to time. With effect from September 2010, for -
profit companies have also been allowed to be engaged as BCs. India map of Financial Inclusion by
MIX provides more insights on this.[10]
Use of technology:Recognizing that technology has the potential to address the issues of outreach
and credit delivery in rural and remote areas in a viable manner,banks have been advised to make
effective use of information and communications technology (ICT), to provide doorstep banking
services through the BC model where the accounts can be operated by even illiterate customers by
using biometrics, thus ensuring the security of transactions and enhancing confidence in the banking
system.
Adoption of EBT: Banks have been advised to implement EBT by leveraging ICT-based banking
through BCs to transfer social benefits electronically to the bank account of the beneficiary and
deliver government benefits to the doorstep of the beneficiary, thus reducing dependence on cash
and lowering transaction costs.
GCC:With a view to helping the poor and the disadvantaged with access to easy credit, banks have
been asked to consider introduction of a general purpose credit card facility up to `25,000 at their
rural and semi-urban branches. The objective of the scheme is to provide hassle-free credit to
banks’ customers based on the assessment of cash flow without insistence on security, purpose or
end use of the credit. This is in the nature of revolving credit entitling the holder to withdraw up to the
limit sanctioned.
Simplified branch authorization:To address the issue of uneven spread of bank branches, in
December 2009, domestic scheduled commercial banks were permitted to freely open branches in
tier III to tier VI centres with a population of less than 50,000 under general permission, subject to

reporting. In the north-eastern states and Sikkim, domestic scheduled commercial banks can now
open branches in rural,semi-urban and urban centres without the need to take permission from RBI
in each case, subject to reporting.
Opening of branches in unbanked rural centres: To further step up the opening of branches in
rural areas so as to improve banking penetration and financial inclusion rapidly, the need for the
opening of more bricks and mortar branches, besides the use of BCs, was felt. Accordingly, banks
have been mandated in the April monetary policy statement to allocate at least 25% of the total
number of branches to be opened during a year to unbanked rural centres.
Financial Inclusion Index[edit]
On June 25, 2013, CRISIL, India's leading credit rating and research company launched an index to
measure the status of financial inclusion in India. The index- Inclusix- along with a report,[11] was
released by the Finance Minister of India, P. Chidambaram[12] at a widely covered program at New
Delhi. CRISIL Inclusix is a one-of-its-kind tool to measure the extent of inclusion in India, right down
to each of the 632 districts. CRISIL Inclusix is a relative index on a scale of 0 to 100, and combines
three critical parameters of basic banking services — branch penetration, deposit penetration, and
credit penetration —into one metric. The report highlights many hitherto unknown facets of inclusion
in India. It contains the first regional, state-wise, and district-wise assessments of financial inclusion
ever published, and the first analysis of trends in inclusion over a three-year timeframe. Some key
conclusions from the study are:[13]
 The all-India CRISIL Inclusix score of 40.1 is low, though there are clear signs of progress –
this score has improved from 35.4 in 2009.
 Deposit penetration is the key driver of financial inclusion – the number of savings accounts
(624 million), is almost four times the number of loan accounts (160 million).
 618 out of 632 districts reported an improvement in their scores during 2009-2011.
 The top three states and Union Territories are Puducherry, Chandigarh, and Kerala; the top
three districts are Pathanamthitta (Kerala), Karaikal (Puducherry), and Thiruvananthapuram
(Kerala).
Controversy[edit]
Financial inclusion in India is often closely connected to the aggressive micro credit policies that
were introduced without the appropriate regulations oversight or consumer education policie s. The
result was consumers becoming quickly over-indebted to the point of committing suicide,[14] lending
institutions saw repayment rates collapse after politicians in one of the country's largest states called
on borrowers to stop paying back their loans, threatening the existence of the entire 4 billion a year
Indian microcredit industry.[15][16] This crisis has often been compared to the mortgage lending crisis in
the US.[15]

The challenge for those working in the financial inclusion field has been to separate micro -credit as
only one aspect of the larger financial inclusion efforts and use the Indian crisis as an example of the
importance of having the appropriate regulatory and educational policy framework in place.
Tracking Financial Inclusion through Budget Analysis[edit]
While financial inclusion is an important issue, it may also be interesting to assess whether such
inclusion as earmarked in policies are actually reaching the common beneficiaries. Since the 1990s,
there has been serious efforts both in the government agencies and in the civil society to monitor the
fund flow process and to track the outcome of public expenditure through budget tracking.
Organisations like International Budget Partnership (IBP) are undertaking global surveys in more
than 100 countries to study the openness (transparency) in budget making process. There are
various tools used by different civil society groups to track public expenditure. Such tools may
include performance monitoring of public services, social audit and public accountability surveys. In
India, the institutionalisation of Right to information (RTI) has been a supporting tool for activists and
citizen groups for budget tracking and advocacy for social inclusion.
Pradhan Mantri Jan Dhan Yojana[edit]
Main article: Pradhan Mantri Jan Dhan Yojana
Indian Prime Minister Narendra Modi announced this scheme for comprehensive financial inclusion
on his first Independence Day speech on 15 August 2014. The scheme was formally launched on 28
August 2014[17] with a target to provide 'universal access to banking facilities' starting with Basic
Banking Accounts with overdraft facility of Rs.5000 after six months andRuPay Debit card with inbuilt
accident insurance cover of Rs. 1 lakh and RuPay Kisan Card & in next phase, micro insurance &
pension etc. will also be added.[17] In a run up to the formal launch of this scheme, the Prime Minister
personally mailed to CEOs of all banks to gear up for the gigantic task of enrolling over 7.5 crore (75
million) households and to open their accounts.[18] In this email he categorically declared that a bank
account for each household was a "national priority".
On the inauguration day of the scheme, 1.5 Crore (15 million) bank accounts were opened

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