Financial Inclusion Index (FI-Index)

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Context

• The Financial Inclusion Index (FI-Index), which measures the extent of financial inclusion across India, reached 64.2 in March 2024, up from 60.1 in March 2023, according to the Reserve Bank of India (RBI).

Financial Inclusion Index (FI-Index)

• The Financial Inclusion Index (FI-Index), launched by the Reserve Bank of India (RBI) on August 17, 2021, tracks the progress of ensuring access to financial services, timely credit, and affordability for vulnerable groups.

Purpose and Construction:

• Purpose: Measures the extent of financial inclusion on a scale from 0 to 100, where 0 indicates complete financial exclusion and 100 signifies full financial inclusion.
• Parameters: Comprises Access (35% weight), Usage (45% weight), and Quality (20% weight), each evaluated across multiple indicators totaling 97.

Sub-Indices and Weightage:

• Access (35% weight): Measures ease of access to financial services.
• Usage (45% weight): Reflects the extent of use of financial services.
• Quality (20% weight): Assesses the quality of financial services.

Publication:

• The FI-Index is published annually every July.

Historical Progress:

• As of March 2021, the FI-Index stood at 53.9, reflecting growth from 43.4 in March 2017.
• Published annually in July, the index indicates cumulative efforts towards enhancing financial inclusion.

RBI's Perspective:

• The FI-Index supports inclusive growth by facilitating access to credit and safety nets, crucial for economic stability.
• Enhanced by digital initiatives like Aadhaar and mobile proliferation, it underscores the role of payment systems in fostering financial inclusion.

National Strategy for Financial Inclusion:

• Objectives: Universal access, basic financial services, livelihood support, financial literacy, customer protection, and coordination.
• Initiatives: PMJDY has expanded banking infrastructure; efforts focus on integrating insurance and pension schemes.
• Educational Focus: Tailored modules and expanded literacy centers aim for nationwide coverage by March 2024.

Conclusion:

• The improvement in the Financial Inclusion Index to 2 in March 2024 highlights the ongoing efforts and progress in enhancing financial inclusion in India, with significant contributions from increased usage of financial services.
• The FI-Index serves as a vital tool in monitoring and promoting financial inclusion across India, reinforcing economic output, poverty reduction, and gender empowerment through strategic initiatives and comprehensive evaluation.

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Financial Inclusion in India:

Definition and Scope

• Financial inclusion in India encompasses ensuring access to a wide array of financial services and timely credit at affordable costs, primarily targeting vulnerable groups such as weaker sections and low-income groups.
• This initiative aims to integrate these groups into the formal financial system, providing them with opportunities for economic stability and growth.

Importance

• Financial inclusion plays a crucial role in economic development by promoting a culture of savings among rural populations and safeguarding their financial resources from exploitation by informal lenders.
• By offering access to formal credit, it facilitates investments in productive activities, thereby contributing to overall economic growth.

Extent of Financial Exclusion

• The disparity in financial access is evident from various indicators such as the Gini coefficient, which shows higher inequality in rural areas compared to urban centers.
• Multiple indices, including the Financial Inclusion Index (FI-Index) and CRISIL Inclusix, measure and track the progress of financial inclusion across different regions and demographic segments.

Government Initiatives and Policies

• The Reserve Bank of India (RBI) has adopted a bank-led model to promote financial inclusion, removing regulatory barriers and creating a conducive environment for banks to expand their outreach.
• Initiatives like Basic Saving Bank Deposit (BSBD) accounts with relaxed KYC norms have simplified access to banking services, particularly for underserved populations.

Progress and Metrics

• Significant strides have been made in expanding banking infrastructure, evidenced by the growth in the number of banking outlets and BSBD accounts.
• Issuance of specialized instruments like Kisan Credit Cards (KCCs) and General Credit Cards (GCCs) has enhanced access to credit for farmers and small businesses, supporting their financial needs.

Technological Advancements

• Digital innovations such as Unified Payments Interface (UPI), Bharat QR, Bharat Bill Pay System (BBPS), and the RuPay card have revolutionized financial transactions, particularly in rural areas.
• The integration of Jan Dhan accounts, Aadhaar, and mobile phones (JAM trinity) has further facilitated financial inclusion by enabling easy access to banking services remotely.

Challenges and Stakeholder Issues

• Despite progress, challenges remain, including uneven geographic distribution of banking services and the need for enhanced financial literacy among rural populations.
• Addressing these issues is crucial to ensuring sustainable and inclusive growth across all segments of society.

Future Directions

• The National Strategy for Financial Inclusion (NSFI) and National Strategy for Financial Education (NSFE) outline a roadmap for coordinated efforts to enhance financial literacy, consumer protection, and expand financial access.
• Continued emphasis on expanding rural banking infrastructure and leveraging digital technologies will be pivotal in achieving comprehensive financial inclusion in India.

S.No	Issues	Remarks	Stakeholders
1	Business Correspondents (BC)	For effective functioning in reaching poor villagers, BCs need adequate compensation and support from bank branches. Training programs are crucial for BCs to address operational challenges and customer grievances.	Banks
2	Tailor Made Services; Innovative Products	Designing innovative, affordable products and simplified credit procedures are essential to attract villagers away from money lenders.	Banks
3	Technology Applications; ATM-Network; RuPay Network; KCC/GCCs; Mobile Banking; TSPs	Enhancing rural ATM networks, leveraging RuPay cards, and expanding mobile banking are critical. Addressing safety and security concerns is paramount.	Banks/RRBs, Co-op Banks
4	BSBD Accounts	Dormancy in Basic Savings Bank Deposit (BSBD) accounts needs to be addressed by improving economic activity.	Governments, Banks, RRBs
5	Use of PACs and Primary Cooperatives as BCs	Utilizing PACs as business correspondents can extend rural outreach effectively.	Banks, RRBs, State Governments
6	Financial Inclusion in Urban Areas	Urban financial inclusion requires significant improvement, especially due to rural-urban migration.	Banks
7	Remittance Corridors	Providing easy and affordable remittance facilities is crucial for migrant populations.	Banks
8	Migrants are not Adequately Covered	Banks need to simplify account opening procedures to cater to migrant populations.	RBI, Banks
9	Human Face of Banking	Training programs are essential to enhance customer interaction skills among banking staff and BCs.	Banks
10	Agriculture Advances	Prioritizing credit access for small farmers over large ones is crucial for inclusive growth.	Banks
11	Scalability of CBS Platform	CBS platforms need scalability to manage increased workloads from financial inclusion efforts.	Banks, RRBs
12	Electronic Benefit Transfer (EBT)	Promoting EBT systems effectively can boost financial inclusion plans.	Banks
13	Ultra Small Branches	Setting up ultra small branches can support BC operations effectively.	New Private Banks, RRBs
14	Low Credit Share of Rural Areas	Initiatives are needed to increase credit absorption capacity in rural areas for balanced development.	Banks, Government
15	Private Sector banks need to open more branches in rural areas	Private banks must expand rural branches to improve access to financial services.	Private Banks
16	Penetration of RRBs in Financially excluded Regions	RRBs should increase presence in financially excluded central and eastern regions.	RRBs
17	Infrastructure Development	Improving digital and physical connectivity, and power supply is essential for scaling up financial inclusion efforts.	Central & State Governments
18	Vernacular Languages	Financial literacy efforts should be conducted in vernacular languages to reach more people effectively.	Banks, Other FIs
19	Private Corporate Initiatives	Corporate projects can significantly impact economic development in rural areas.	Private Corporates
20	Post-offices	Leveraging post offices as BCs can enhance rural outreach due to their extensive network.	RBI, Government
21	White Label ATMs	Expanding white label ATMs can improve access to cash in rural areas.	RBI, Private Corporates
22	MSME – Financial Exclusion	Understanding reasons for MSMEs not accessing formal credit sources is crucial for inclusive growth.	SIDBI, Banks
23	SHG-Bank Linkage - Penetration	Improving SHG-bank linkage in financially excluded regions is necessary for balanced development.	NABARD
24	SHG-Bank Linkage Outstanding Bank Credit	Enhancing bank loans to SHGs can support rural economic activities effectively.	NABARD
25	Insurance for Rural India	Expanding insurance coverage in rural areas presents significant business opportunities for insurers.	IRDA

PRACTICE QUESTION Q. Highlight the role of various stakeholders in promoting financial inclusion in India. Discuss how collaborative efforts among these stakeholders can be enhanced to achieve comprehensive financial access across the country.

SOURCE: THE INDIAN EXPRESS