The State of Financial Inclusion in India

15 million bank accounts were opened, creating a world record, on the first day of Pradhan Mantri Jan Dhan Yojana. A total of 320 million bank accounts were opened within 4 years of launching the scheme in 2014. With Pradhan Mantri Jan Dhan Yojana, the target of the government was promoting financial inclusion.

While India fares well on the deposit accounts aspect due to constant regulatory pushes like Jan Dhan Yojana, no-frills accounts and Direct Benefit Transfers(DBT), real financial inclusion should translate into availability of institutional and cheap credit for the masses.

India lags behind on the penetration of institutional credit for consumers with consumer debt to GDP at 17%, India is significantly behind other major economies of Asia-Pacific.

Source: India Financials Sector, Credit Suisse

India’s dismal credit penetration remains a cause of worry for the government and regulatory authorities. Availing credit at low interest rates allows people at the bottom of the pyramid to invest in pursuits, which can improve their standard of living over the long term. In the absence of institutional credit at fair interest rates for a majority of the population, people at the bottom of the pyramid are left devoid of opportunities and fail to be included in the financial system.

Challenges in financial inclusion

At 8.2% growth in GDP, India’s economy is the fastest growing major economy in the world. With growth, the need for credit goes up to facilitate both consumption and investment, the two pillars of growth. Indians at every level seek credit for their business and personal needs but the financial institutions, i.e. Scheduled Banks, NBFCs, Micro-Finance Institutions, etc. are unable to cover the needs for all.

In spite of all the push from the regulatory authorities, the overall pace of financial inclusion is getting hindered due to the following factors.

Informal nature of economy

With less than 20% of workforce employed in the organized sector, getting employment and income data for the majority is almost impossible. Same can be said about the tax history as only 1.7% of the Indian population is a regular income-tax payer.

Most of the high-frequency, low-ticket-size transactions, which form the bulk of the overall transactions don’t get recorded, while most of the businesses are informally managed and their financial records are also very difficult to get.

Credit bureau coverage & thin-file cases

This issue is highly relevant for emerging economies like India, since most of the credit seekers are new to credit and haven’t approached a formal lending institution before.

With a Credit Bureau coverage of less than 45%, most of the applicants get rejected due to the lack of historical data on past loan performances. Even for customers having a record with any of the credit bureaus, in most of the cases, their files are thin and don’t have enough data to have any significant impact on the final decision.

Inadequate infrastructure

India is a vast and highly diverse country which leads to multiple problems niche only to India.

With the improvement in public infrastructure, the number of commercial bank’s branches has nearly doubled from 71,685 in 2006 to over 138,850 in 2016. The lack of public infrastructure was one of the most significant bottlenecks preventing the down streaming of institutional lenders to the hinterlands. Financial institutions have started offering their services digitally, and their online services are gathering traction.

Weak contract enforcement

The lack of confidence in contract enforcement abilities of public authorities has been dissuading institutional lenders from lending to masses at large. Institutional lenders have always found it challenging to collect the installments in case of defaulting customers, which fuels up the cost of collections and recovery. The operational hassles and financial burn of contract enforcement as whole disincentives the lenders against financial inclusion.


Due to the factors mentioned above, the financial inclusion hasn’t caught up with other macro-indicators. This might have prevented the complete democratization of the country even post 70 years since independence, but another kind of democratization has gathered pace over the last couple of years — the data democratization.