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Financial Inclusion: 35% bank accounts are inactive


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Financial inclusion in India has traditionally been defined as having a bank account, accessing credit from formal financial institutions, and using digital payment systems like UPI. While there has been significant progress in increasing access to bank accounts and UPI payments in the past decade, it is important to consider what comes next for financial inclusion in India.

The Three Roles of Finance

Finance serves three important purposes in our lives. First, it helps us grow our savings by earning interest or returns on our investments. This allows us to have funds for future consumption or unexpected expenses. Second, it helps us manage risks by providing insurance coverage for unforeseen events. And third, it helps us smoothen our consumption by enabling us to borrow money for large expenses or during difficult times.

True financial inclusion goes beyond access to basic financial products. It involves having a healthy mix of financial instruments in household portfolios and ensuring individuals have the necessary financial literacy to make informed choices. Moreover, financial inclusion is meaningful when households can take actions that would not be possible without access to financial products.

Evaluating Financial Inclusion in India

While India has made progress in increasing the number of people with bank accounts, this achievement is not significantly different from other middle-income countries. Countries like Mongolia and Kenya have also seen similar progress in this regard. However, it is worth noting that India has the highest number of inactive bank accounts, with 35 percent of accounts being unused, according to the Global Findex Database 2021. The median number of inactive accounts in the dataset is 8 percent.

The spread of financial products in India is evident in the significant growth in assets under management (AUM) of mutual funds, the issuance of new insurance policies, and the increase in demat accounts. However, two metrics suggest that the spread may not be as wide as it seems.

Firstly, as of March 2023, the majority of household financial assets in India are still held in bank deposits and fixed deposits, with only a small percentage allocated to life insurance and mutual funds. Additionally, a survey conducted by Dvara Research and XKDR Forum revealed that ownership of risk-free assets, retirement savings instruments, and risky assets are relatively low among households. This indicates that households predominantly save in banks and fixed deposits, limiting their exposure to other financial instruments.

Secondly, the geographical spread of financial products in India is uneven. The top five cities, including Mumbai, Delhi-NCR, Bengaluru, Pune, and Kolkata, account for over 60 percent of the total AUM of mutual funds. This suggests that the penetration of financial products is concentrated in urban areas, indicating a need for broader access across the country.

Gender Gaps in Financial Inclusion

Gender gaps persist in financial inclusion, with a larger number of dormant bank accounts held by women and lower participation in investment decisions across various financial instruments. These disparities are influenced by social structures and low female labor force participation. Addressing these issues requires not only financial interventions but also changes in societal norms and gender dynamics.

The Path to Improved Financial Inclusion

Improving access to and usage of financial services is a complex challenge that requires a multi-faceted approach. It involves designing products that meet the needs of diverse populations, ensuring easy access to these products, promoting financial literacy, and establishing robust grievance redress processes. When these elements come together, households can truly benefit from the potential that finance has to offer.

Financial inclusion is an ongoing journey, and there is still work to be done to ensure that all individuals and households in India have equal access to and can fully utilize financial products and services.

One Comment

  1. 35% accounts are inoperative due to non educate the rural customers about Banking Deposit and start up schemes by CSPs. Most of Bank correspondent share their password and they themselves indulge in other sources of incone, resultantly, many times embezzlements occurs and ruin the image not only the branch while Bank as a whole.

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