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Financial Inclusion in Rural India

GS Paper 3

 Syllabus: Inclusive Growth, Issues Relating to Poverty/ Welfare Schemes for Vulnerable Sections


Source: DTE

 Context: According to a new study, access to financial services such as bank accounts can help Indian rural households cope better with challenges such as poverty, inequality, and climate risks.


Need for financial inclusion in rural India:

  • A key driver of economic growth, poverty alleviation and prosperity.
  • Access to formal finance can boost job creation, reduce vulnerability to economic and climate shocks and increase investments in human capital.
  • At a macro level, it can support sustainable and inclusive socio-economic growth for all.


Financial institutions for inclusion:

  • Scheduled commercial banks
  • Regional rural banks
  • Payment banks
  • Micro-finance institutions
  • Business correspondents (Bank Mitra)
  • Small finance banks


Highlights of the study:

  • 59% of the surveyed households experienced climate shocks in at least one of the five previous years → using their own savings to cope with the issue.
  • As rural households have limited access to liquidity, they take high-interest loans from informal sources.
  • Households rely on financial assistance from kin and relatives followed by friends, village communities, money lenders, and banks (in this order).


Factors affecting access to financial services:

  • Location: Most commercial banks set up their branches in profitable urban commercial areas.
  • Lack of infrastructure in rural and semi-urban areas: Lack of access to a formal banking outlet, proper internet, electricity, etc., are major roadblocks to both consumers and financial institutions.
  • Rising unemployment and low wages: Financial conditions of people plays a pivotal role in accessing available financial services.
  • Service charges: High bank charges not only discourage people but also create a lack of trust among people using banking and financial services.


Government efforts:

  • The Pradhan Mantri Jan Dhan Yojana (PMJDY)
  • Direct Benefits Transfer (DBT)
  • Aadhaar Enabled Payment Services (AePS)
  • Bharat Interface for Money (BHIM)-UPI


Key challenges for India: While 80% of the Indian population may have bank accounts, almost 45% of such accounts still remain inactive due to a combination of –

Best practices:

  • Companies such as Vakrangee Ltd., BTI payments, FINO, etc., have provided many banking and ATM services through a technology-driven platform.
    • They have managed to boost rural entrepreneurship and increase the level of financial literacy.
  • The PM Mudra Yojana provides collateral-free loans up to Rs. 1 million for small and micro enterprises.


Way ahead:

  • Financial inclusion will reduce the resources that households need to keep in liquid form and therefore make them available for productive investments to address climate risk.
  • Climate adaptation requires putting resources in the hands of people because they are best placed to understand climate impacts.


Insta Links:

The financial inclusion of women