Financial Inclusion in India: Is the Glass Half Empty of Three Quarters Full?

While much attention has been paid to India’s economic growth, the extent of financial inclusion within the country is rarely examined. This paper assesses financial inclusion in India and provides pointers to what can be done to increase inclusion as an important component of India’s overall economic growth strategy. As India’s economy continues to grow and incomes rise, there is an increased need for financial services. There has been considerable improvement in the deepening of the financial system through growth in bank credit and the spread of deposit facilities. However, it is important to examine access to credit in both urban and rural areas and deposit services of small and medium enterprises to determine the true reach of the financial sector. The issue of financial inclusion is especially important today as India’s rural economy has shifted towards more commercialized agriculture and non-agricultural activities, both of which require banking facilities. The evidence on financial inclusion is mixed. The situation is not as poor as has been asserted in recent analyses. There appears to be relatively healthy access to secure formal facilities for savings, but access to credit in rural areas has not grown as might be expected. In particular, resort to informal sources for credit has increased for emergency and consumption purposes. Steps that need to be taken include reducing the costs incurred by lenders when serving rural communities by setting up credit information bureaus, developing risk assessment techniques, adopting new technologies and utilizing business facilitators and correspondents to increase outreach. Improvement in financial inclusion will help the further development of India’s financial system and accelerate economic growth.