We’ve always thought of financial inclusion as having a bank account, being able to access credit from banks instead of a money-lender, and using UPI to make payments. There is no doubt that India has made considerable progress on at least two counts. In the last 10 years, more households have gotten access to bank accounts and UPI payments. Banks are lending to households much more than they have ever done.
While we congratulate ourselves on the progress so far, we should also ask, what is next for us on financial inclusion?
How do we measure financial inclusion?
Finance helps us do three things. First, it helps us increase the size of our savings kitty. When we invest in a savings instrument, the interest or returns earned grows the amount of money we have to spend as we like, or as life may demand. It is how we all hope to finance our consumption when we no longer have income. Second, it helps us manage risks. When we buy a life insurance policy, we are ensuring that our families will be left with enough funds should something happen to us. Third, it helps us smoothen consumption when times are difficult or when large expenditures have to be made upfront. When we borrow, we can make those down payments that our current cash flows may not support.
We will have achieved financial inclusion when there is a healthy mix of all instruments in household portfolios, and when individuals have enough financial literacy to exercise their choices. Moreover, financial inclusion is truly meaningful when households are able to take actions that would not be feasible without access to financial products.
How do we fare on broader metrics of financial inclusion?
Account usage: Although India has made considerable progress in increasing the number of people with bank accounts, this achievement was not too different from other middle-income countries. Countries like Mongolia and Kenya have also made similar progress in bank account openings. Additionally, the number of inactive accounts was the largest in India at 35 per cent, according to the Global Findex Database 2021. The median number of inactive accounts in the dataset was 8 per cent.
Household portfolios: The assets under management (AUM) of mutual funds were Rs 8.2 lakh crore in March 2014. They now stand at Rs 53.4 lakh crore. Between March 2014 and 2024, the Indian insurance industry issued 29.1 crore new insurance policies. Indian markets went from having 1.3 crore demat accounts in April 2015 to 3.5 crore accounts by March 2024. This would suggest that the spread of financial products is indeed wide. But there are two metrics that suggest otherwise.
As of March 2023, India’s total financial assets were Rs 2.8 lakh crore. Of these, 45 per cent were in bank deposits, 21 per cent in life insurance, and 8 per cent in mutual funds, and the remaining in instruments such as currency, public provident fund (PPF) and other small savings schemes. A survey conducted by Dvara Research and XKDR Forum, average ownership of risk-free assets was at 5 per cent, and that of retirement savings instruments and risky assets was even lower at 2 per cent and 1 per cent respectively. Households predominantly still save in banks and fixed deposits.
Geographical spread: The data on mutual funds, demat accounts and insurance policies is based on folios (or accounts), and not on individuals. If the same individuals end up having multiple folios, then what we have is deepening of financial access, and not widening. One proxy for this is the geographical spread of these financial products.
Let’s take the example of mutual funds. According to the Association of Mutual Funds in India (AMFI), the top five cities of Mumbai, Delhi-NCR, Bengaluru, Pune and Kolkata accounted for 53 per cent of the total AUM. The next 10 cities accounted for 13 per cent of the total AUM. Thus the top 15 cities of India account for more than 60 per cent of the total AUM. This implies that we still have a long way to go before the spread of financial products is said to be pan-India.
Gender gaps: Gender gaps persist in finance. While the number of bank accounts held by women may have increased, the number of dormant accounts remains large. The engagement of women in investment decisions across multiple financial instruments is lower. This is not surprising given the social structures and low labour force participation. This is certainly not a problem that can be solved only in the financial sphere without first changing our social set-up. But yet, it is indicative of the distance that finance has to go before everyone is included.
Also read: Lending more to households. Not enough data to call it a sign of prosperity
The challenge
Improving access to and usage of finance is not a simple problem. It requires a combination of product design, easy access to products, financial literacy, and robust grievance redress processes. When all of these elements come together, households can truly benefit from what finance may be able to offer.
Renuka Sane is managing director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering. Views are personal.
(Edited by Ratan Priya)