The Financial inclusion index brought out by the RBI is very timely and important as it attributes a number to everything we talk of on the subject. Financial inclusion has been on the agenda of all governments and regulators and goes beyond the concept of providing a deposit account or loan. The index includes 97 attributes that are extensive and one assumes that they cover capital markets insurance and other banking services. The index is to be announced every July and as of now the RBI tells us that the index is at 53.9 as on March 2021, compared with 43.4 in March 2017. It includes three main attributes: access, usage and quality.
The dates chosen are interesting, as 2017 comes just as we came out of demonetisation, where people perforce had to go digital, which provided an impetus to digital banking. This was also the time when there was widespread use of the Jan Dhan account, which has now become the conduit for channeling any cash transfers to beneficiaries. Therefore, there has been a big push given by the government to inclusion through this account. Hence it is expected that access and usage would tend to increase automatically as funds keep passing through these accounts. Also, with digital banking picking up fast, it would add weight to this index.
It may be recollected that the government launched some rather aggressive insurance schemes for farmers and individuals, which means that there has been a tendency for greater coverage of the population under insurance. The PM health insurance scheme has been popular and actually enhances insurance coverage to all the needy people. This gets reflected in the score going up by around 10 points.
The index has to be read as a number and is not linked to a base year. Hence a number of 100 would mean that based on the criteria used the entire population is included in the financial system. One can hope that this number only increases with time. The pace of increase will be important here.
Some thoughts that come based on the limited information provided by the RBI on the index are the following. First, in terms of banking we may have reached the optimal situation as incremental Jan Dhan accounts have been slow. Also with the currency situation normalising, the push to digitisation is less intensive. Second, for this number to increase, non-banking services have to increase. Here the population has to use more of mutual funds and insurance products. Will this really accelerate? Insurance companies and mutual funds have a challenge here as typically low income people are small-ticket customers and the cost of inclusion is high and may not be worth their while. Third, even for banking it would be interesting to see if the transactions being witnessed go beyond the forced Jan Dhan accounts which receive wages, pensions and transfers. People actually need to use these accounts for regular transactions and hopefully the detailed index should reflect this aspect of quality.
Ideally it would be useful if the RBI would break this index up across various segments so that there can be concentration on the specific sector. The progress so far is impressive for sure, but there could be a bias towards banking and further to areas where the government has pushed financial products as part of its social development programmes. This is a very good start made by the RBI which should be monitored regularly to gauge the pace of progress as it will help future policy formulation in the right direction.
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