Financial Inclusion: A Key Imperative for Inclusive Growth

Col Sunil Sharma | Expert's Blog, Blog | April 1, 2025

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Financial inclusion is an innovative concept, and its central role has been widely recognised by world leaders and policymakers since it is closely interrelated with the more general notions of inclusive economic growth and sustainable development, as highlighted in the 2015 United Nations Global Sustainable Development Report.

The commitment to ‘leave no one behind’ is one of the core targets in the post-2015 Millennium Development Goals Framework of the 2030 Agenda to promote broader access and usage of financial services. Indeed, when access to finance and the available range of services are limited, many individuals, families, and firms are not likely to gain from financial development, leaving much of the population in absolute poverty.

Any growth strategy that does not pay attention to inclusive growth is not holistic and sustainable. Inclusive growth is the only mantra to ensure market enlargement, as nearly 73% of the rural households remain unbanked by the banking system.

Financial inclusion in India

An inclusive financial system facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital. Access to appropriate financial services can significantly improve the day-to-day management of finances (bill payment, money transfer, etc.). Also, inclusion in the financial system protects unbanked people from informal sources of credit, which charge higher interest rates and often resort to unethical/harsh recovery practices.

A bank account can also provide a passport to wide-ranging financial services such as overdraft facilities, debit cards, and credit cards. A number of financial services, such as insurance and pensions, necessarily require access to a bank account. Thus, an inclusive financial system enhances the efficiency and welfare of a society.

Challenges in Expanding Financial Inclusion in Rural India: Barriers to Accessing Formal Credit Systems

Financial inclusion also benefits society more broadly. Shifting payments from cash into accounts allows for more efficient and more transparent payments from governments or businesses to individuals and from individuals to governments or businesses. Although no conclusive evidence exists at this point, access to the formal financial system and appropriate credit can potentially facilitate investments in education and business opportunities that could, in the long term, boost economic growth and productivity.

The NSSO survey indicates that nearly 27% of the rural households have access to the formal credit system and 22% to the informal credit system. In spite of the above-mentioned initiatives by the Government of India to enhance the outreach of the formal credit system, 73% of the rural households still do not have access to the formal credit system. This is mainly because of the following dimensions:

The majority of the rural population resides in small villages that are far away from the branches.
Non-familiarity with the systems and procedures; multiple visits to bank branches for securing a loan; and inadequacy of local transport systems, etc.
High transaction cost to the customer in terms of time and money
Bankers shy away as their transaction cost is very high to deal with such customers, as they have to spend a lot of time for these customers; the loan amount is small, and the population to be handled is large, etc.

The Challenges to Financial Inclusion

There are many challenges faced by banks in India in the financial inclusion process.

Penetration of bank branches into rural areas is difficult, as they are unviable, saturated, and have higher transaction costs. The villages are fragmented, limiting the scale of operation of banks in rural areas. This necessitates the last mile of financial inclusion to be met with a combination of agents and providers through technology leverage.
The present Business Correspondent (BC) model is too restrictive, cash delivery points are too modest, and the ideal financial inclusion model is yet to evolve in the country.
The robust financial inclusion model requires comprehensive participation of all stakeholders, which is currently lacking in the country. Financial inclusion among the urban poor warrants an alternate strategy, as the physical access is not the critical issue here.
The pricing of financial assets and services is delicate in urban areas, as it should ensure the poor are able to afford them at these prices.
Also, urban poor, particularly the slum dwellers, suffer from identification problems as they are frequently moving from one part of the city to another or from one city to another.
Lack of financial literacy among the urban poor or lack of marketing of financial instruments to the urban poor leads to limited awareness of financial portfolios by these people.
Sometimes there is a self-exclusion by the poor from the formal system, as they are heavily dependent on the informal credit sources, which cater according to their convenience.

What are the perspectives on financial inclusion?

Inclusive Growth and Financial Inclusion: Pillars for Sustainable Economic Development

Economic growth in India has to be inclusive in order to make it sustainable. Inclusiveness is an essential element in a democracy. If policies that bring about economic growth do not benefit the people in a wide and inclusive manner, they will not be sustainable. Equally, inclusive growth is essential to grow the market size, which alone will sustain growth momentum. Inclusive growth is the only just and equitable way that any society can grow.

Financial inclusion rests on three pillars, viz., access to financial services, affordability of such services, and actual utilisation of such services. Financial inclusion can be achieved only if all three pillars show affirmative results. It may prove to be very useful for the banking industry and the overall Indian economy. It will be useful for policymakers, academicians, and researchers in the field.

A specific focus on financial inclusion commenced in India when the Reserve Bank advised banks to make available a basic banking ‘no-frills’ account with a low or ‘nil’ minimum balance as well as charges, with a view to expanding the outreach of such accounts. In such accounts, banks are required to make available all printed material used by retail customers in the regional language concerned.

In order to ensure that persons belonging to low-income groups, both in the urban and rural areas, do not encounter difficulties in opening bank accounts, the know your customer (KYC) procedure for opening accounts has been simplified.

Besides the Kisan Credit Cards (KCCs), banks have been asked to consider the introduction of a General-purpose Credit Card (GCC) facility at their rural and semi-urban branches. This facility is in the nature of revolving credit, which entitles the holder to withdraw up to the limit sanctioned. Based on an assessment of household cash flows, limits are sanctioned without insistence on security or purpose. The interest rate on the facility is completely deregulated. Fifty per cent of GCC loans can be treated as priority sector lending.

Despite the difficulties faced by banks to expand their operations in the rural areas, RBI is seized with the idea of issuing fresh banking licences to private players with the intention of improving financial inclusion indicators. The idea behind this thinking is that a country’s credit–GDP ratio is about 50 per cent, which warrants the expansion of banking networks. But this expansion should be directed towards the coverage of unbanked/underbanked/excluded sections in rural areas.

To fully realise the benefits of financial inclusion, then, financial products first and foremost need to be tailored to the needs of people to be relevant and make a difference in their financial lives. This also includes customer education and protection to build and ensure trust in the formal financial system.

Building a Robust Financial Infrastructure: Innovation, Alternative Credit Scoring, and Fintech Solutions

On a more fundamental level, realising the benefits of financial inclusion depends on an adequate financial infrastructure and a regulatory environment that is conducive to innovation, making small financial transactions economically viable, and ensuring a safe, stable, and reliable financial system.

Traditional credit scoring metrics may alienate or discriminate against those with limited credit history. Financial inclusion strives to explore alternative credit scoring methods that consider non-traditional data sources that can extend credit access to those with limited credit history.

Fintech lending platforms connect borrowers and lenders directly through online platforms. Borrowers can apply for loans, and lenders can assess their creditworthiness based on data analytics and alternative credit scoring. This streamlines the lending process and extends credit access to individuals and businesses underserved by traditional banks or those who would have otherwise been excluded from securing traditional credit.

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Innovative Approaches and Tools for Expanding Financial Access

According to Women’s World Banking, 31% of women are more likely than men to have an inactive bank account. But focusing on gender-specific financial inclusion can help empower women economically and close the gender gap in financial services.

Financial education and financial literacy refer to providing financial education and programmes that equip individuals with essential financial knowledge and skills. This empowers them to make informed decisions, budget effectively, and understand the benefits of using formal financial services instead of relying on informal or potentially exploitative alternatives.

While regulators in certain markets have required banks to offer basic accounts, simplify onerous documentation, or allow correspondent banking (e.g., by post or phone), such measures do not always deliver desired results. Banks must structure highly relevant and possibly simplified financial solutions that meet specific customer needs at an affordable cost.

Digital channels have been instrumental in helping providers overcome challenges related to infrastructure and geography in many developing countries. While digital channels may have the lowest operational costs, effective financial inclusion will likely require a “bricks and clicks” distribution model that includes physical branches to build trust and confidence.

Expanding Financial Access through Agent Banking, Mobile Banking, and Microfinance Institutions

Agent Banking: Post Offices in India can play an important role in providing banking services to rural areas in view of the low bank penetration, credit needs of workers, and wide occupational, income, and educational variations found in villages. India Post has the largest postal network in the world, with 155,000 post offices, 139,000 of which are in rural areas.

Mobile banking is considered the next big step in banking expansion, particularly in the rural sectors. Mobile banking provides a banking interface at low transaction cost using technology. Cost of an ATM transaction using technology. The cost of an ATM transaction is five times that of an M-banking transaction, and transactions at a bank branch are almost 15 times more expensive.

Microfinance Institutions: Based on the success of Grameen Bank in Bangladesh, a large number of microfinance institutions have emerged in India to provide credit and financial products to marginalised sections of society. The network of MFIs needs to be expanded.

Enhancing MSME Support through Credit Guarantees, Financial Literacy, and Localised Banking Initiatives

Credit Guarantee through SIDBI for MSME: Similar measures have been taken to set up credit for the micro, small, and medium enterprises (MSME) sector. The government operates a credit guarantee scheme through SIDBI for providing credit guarantees to banks for their loans to MSMEs so that they can give such loans based on the viability of the project and not insist on collateral.

The guaranteed premium has been reduced, and coverage has increased for smaller loans and backward areas. Credit rating by SIDBI at concessional rates and putting in place a comprehensive credit information system for this sector will go a long way in better credit allocation and pricing.

Credit counselling services, in addition to financial literacy and financial education, are being perceived as important tools to enable people to overcome the problem of indebtedness and seek re-access to the banking system.

It is equally important for banks to strengthen their functioning at the local level for meeting the developmental objectives of the government. The various fora under the Lead Bank Scheme have been very useful in sorting out manual coordination issues. RBI plays a catalytic as well as a coordinating role in these initiatives for enhancing cooperation between the states and the banking systems.

The Future of Financial Inclusion: Trends, Challenges, and Strategic Opportunities

The future of financial inclusion is likely to be shaped by advancements in fintech, such as artificial intelligence, blockchain, and digital currencies. Additionally, greater emphasis on data privacy and security, along with regulatory developments, will influence the trajectory of financial inclusion initiatives worldwide.

Final Thoughts on Financial Inclusion

Financial inclusion means that adults have access to and can effectively use a range of appropriate financial services. Such services must be provided responsibly and safely to the consumer and sustainably to the provider in a well-regulated environment. At its most basic level, financial inclusion starts with having a deposit or transaction account at a bank or other financial institution or through a mobile money service provider, which can be used to make and receive payments and to store or save money.

The purpose of financial inclusion is to provide equitable opportunities to every individual, including those who are marginalised, by accessing formal financial channels in order to get affordable and suitable services for a better life and better income. In light of the implications that inclusive finance has on people’s standard of living and macroeconomic growth, governments around the world are increasingly viewing financial inclusion as essential to economic and social development.

As the economy began to grow at higher rates, the regional and societal disparities called for new strategies to ensure that the banking system meets the requirements of inclusive growth. Such strategies need to be fashioned in a manner that they do not undermine the stability and efficiency of the financial system.

There has never been a better time to seek revenue growth through financial inclusion. Banks that seize this opportunity today—and are able to customise offerings strategically, take advantage of innovative channels, and mitigate risk creatively—will be well positioned to capture market share and play a transformative role in the growth of emerging markets for years to come.

Accordingly, over the last few years or so, several measures have been taken by the Reserve Bank and Government of India to ensure better banking penetration and outreach, particularly that the credit needs of agriculture and small enterprises are met while allowing sufficient flexibility to each bank to evolve its own policies and strategies for the purpose.

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