The G20 Can Bridge India’s Digital Financial Service Gap – Analysis
Financial inclusion — which aims to provide access to financial services for all individuals and businesses regardless of their social and economic status — has gained significant attention globally. The COVID-19 crisis increased the need for contactless financial products and services, accelerating financial inclusion and the evolution of digital finance.
Globally, there has been a great increase in formal bank account ownership from 51 per cent in 2011 to 76 per cent in 2021, with a steep average increase in developing countries from 42 per cent to 71 per cent. During the same period, bank account ownership more than doubled from 35 per cent to 78 per cent in India. But challenges to free access remain, such as the digital divide, lack of financial literacy, cybersecurity and data privacy.
The G20 has recognised financial inclusion as a fundamental driver of economic growth, which reduces economic vulnerability and poverty and enhances people’s quality of life. In 2010, it implemented the first G20 Financial Inclusion Action Plan (FIAP) as part of the Global Partnership for Financial Inclusion (GPFI) — a global platform for promoting financial inclusion.
In 2017, G20 FIAP was aligned with the UN Development Programme 2030 Agenda for sustainable development. Further in 2020, G20 FIAP recognised the role of financial inclusion in mitigating COVID-19’s negative effects through government intervention and technology adoption.
India has been actively involved in the G20 GPFI and participated in various GPFI working groups and task forces. The country contributes to the development of international standards, best practices and policy recommendations for financial inclusion.
One of the key pillars of India’s financial inclusion policy is Pradhan Mantri Jan-Dhan Yojana (Prime Minister’s People’s Wealth Scheme, PMJDY) — a flagship program launched in 2014 that aims to provide financial services to unbanked and underbanked populations. This program has been providing millions of previously unbanked individuals with basic savings accounts, insurance and pension services.
India has also implemented various other policy measures to promote financial inclusion, such as Pradhan Mantri Mudra Yojana (Prime Minister’s Micro Units Development and Refinance Agency Scheme, PMMY), which provides credit facilities to small- and medium-sized enterprises, as well as Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana (Prime Minister’s Life Insurance Scheme), which provide affordable life and accident insurance coverage to economically vulnerable segments of society.
Since its inception in 2015, the PMMY scheme has granted Rs 23.2 trillion (US$283.8 billion) worth of loans to over 408 million beneficiaries. These loans help facilitate collateral-free micro-credit and generate employment opportunities.
The PMMY scheme has also benefited women entrepreneurs as 68 per cent of accounts are reserved for women under this scheme. But the government still needs to address regional and gender disparities, social and regional inequalities, financial illiteracy, information asymmetry, vulnerability to financial fraud and the digital financial divide to achieve inclusive economic growth.
Recent research based on the 77th round of All India Debt and Investment Survey using 2019–20 survey data finds that government financial inclusion programs like the PMJDY have a noticeable impact on households. This research suggests that despite being illiterate, 57 per cent of household heads have access to at least one financial instrument, such as deposits in saving bank accounts, fixed deposits and post office accounts.
Moreover, 50 per cent of the household heads with higher education have access to two or more instruments. Around 6 per cent of illiterate household heads use at least three financial instruments. This indicates that the financial literacy of family members, higher economic activities in the region and better information passthrough increase the awareness of financial products and services.
Financial literacy can potentially reduce the marginal impact of illiteracy, allowing more people in rural households to benefit from financial inclusion. But women and other socially excluded entrepreneurs have lower utilisation rates of financial instruments. This is due to the high collateral requirement, preference-based supply-side discrimination and high-interest rates while accessing formal financing. These barriers arise because of the small size of loans and the perceived riskiness of women entrepreneurs.
Despite numerous government programs — including the PMMY Scheme, the Udyogini Scheme, the Dena ShaktiScheme and the Annapurna (Goddess of Food) Scheme — there is still scope to improve the business environment for entrepreneurs in rural areas through financial outreach programs. Appointing more women business correspondents, increasing digital literacy and implementing more women-centric policies would facilitate access to formal finance.
Digital financial services can also fill the gap in improving access to financial services through the G20 High-Level Principles for Digital Financial Inclusion. Doing so would help achieve the gender equality goal of sustainable development. Continued efforts towards advancing financial inclusion policies are crucial to promote empowerment and inclusive growth.