By Shashank Sreedharan
The author is a Research Associate at IFMR LEAD.
Over the past few years, a lot of rigorous research has gone into establishing a link between enhancing financial inclusion and economic growth. One such example is the joint IMF-MIT-NBER study, which suggests that eliminating barriers to financial inclusion has significant impacts on GDP growth. Moreover, a 2017 study by Gretta SAAB highlights the positive impact of financial inclusion on economic growth in developing economies. In the last few years, the Indian government has undertaken significant efforts to promote financial inclusion with flagship schemes such as the Pradhan Mantri Jan Dhan Yojana (PMJDY).
Launched in August 2014, the PMJDY targeted the provision of zero-balance bank accounts to 75 million unbanked Indians, which in turn would give them access to a wide range of financial services. Data from the Ministry of Finance estimates that as of March 2016, the actual number of accounts opened were 213.8 million, which far exceeds the target. However, this data is collected at the household level and does not control for multiple account ownership. March 2016 estimates from PMJDY data and data from the FII Tracker Survey Report for India released by InterMedia showed that 100% of Indian households had a bank account, and that bank account ownership increased from 42% in mid-2014 to 64% in 2016.
The demographics of digital inclusion
InterMedias Financial Inclusion Insights (FII) Data Fiinder is a useful tool with which to examine the relationships between different variables in the financial inclusion ecosystem. These range from financial behaviour and digital and financial literacy to demographic variations in financial inclusion. The FII data shows that 40% of all adult Indians actively use a bank account. However, from 2015 to 2016, use of advanced services such as bill payment and loans has decreased, while basic activities and remittances have increased considerably. This has been attributed to the growth in new account holders. Another positive development is that financial inclusion rose across poverty levels, gender, and urbanicity, with the most prominent increase being registered among lower-income, female and rural adults.
An important aspect of the financial inclusion ecosystem in India today is the push for digital financial inclusion. While bank account registration and access has grown, mobile money awareness continues to remain low at 10%, as does usage at 1%. However, the gender divide on financial inclusion has decreased, with the number of financially included women growing at a faster pace. This may be due, in part, to the role of non-bank financial institutions (NBFIs), which continue to be prominent tools for banking activities among women, rural and poor populations. However, the gender divide in regards to mobile money awareness is more prominent, with 96% women being unaware of mobile money compared to 89% men.
FII data shows that of all financially included adults, 52% are still digitally excluded. Additionally, 58% of all phone owners are digitally excluded. On the literacy front, financial literacy levels in India are at 17% and more than 70% of the population has little to no digital literacy. Even among financially included individuals, only 18% are financially literate, while 22% of digitally included individuals are financially literate.
Financial inclusion and financial literacy
In order to achieve sustainable growth in a rapidly developing economy like India, it is imperative that financial inclusion efforts go hand in hand with efforts to promote financial literacy. A good way to think about it is this: inclusion is a numbers game, while the literacy challenge is a matter of improving quality. Gender continues to be a key demographic differentiator in the financial and digital inclusion and literacy ecosystem. Investing in increasing financial and digital literacy among women, especially poor, rural women, will yield substantial results in efforts towards greater inclusion and empowerment. Efforts to increase financial and digital literacy levels must target different segments differentially.
Poor, rural populations, for instance, need literacy modules in the vernacular. Communication must be simple, addressing overarching points such as the importance of saving, and the importance of having and actively using bank accounts, the disadvantages of saving and borrowing from informal lenders, the need for insurance and information about the different types of financial services available. For the more financially included population, literacy efforts must serve to increase awareness about products such as investments. This needs to be supported by improving literacy among providers as well. Providers need to better leverage technology in their bid to increase inclusion and invest in better product design in order to cater to the varying needs of their diverse client base.
Exploring the gender and literacy divides
Turning to financial behaviour trends: currently, 45% of all adults save, consistent across gender and location, and this number goes up to 53% among phone owners, while only 37% of those who do not own phones save. As expected, nearly 60% of financially included individuals save, while only 25% of financially excluded individuals save. Similarly, nearly 70% of digitally included people save, compared to 35% of digitally excluded people. Of noteworthy importance is the correlation between mobile wallet use and savings71% of mobile money users save compared to 45% of non-users.
On the other hand, the statistics for insurance products paint a dire pictureonly 11% of the adult population has insurance. This trend is starker when gender is introduced, as only 9% of women have insurance compared to 14% of men. Moreover, there is also a rural-urban divide amounting to 9% and 15%, respectively. Surprisingly, there is little disparity between insurance ownership among financially literate and illiterate individuals, although the disparity between financially included individuals buying insurance products (16%) and excluded individuals (4%) is substantial. This indicates a two-fold problem: (1) product design needs to improve, and (2) access to insurance products needs to be expanded soon. This view is reinforced by looking at the relationship between those buying insurance products and those using mobile money46% of mobile money users buy insurance products, while a mere 11% of those who do not use mobile money use insurance.
On the investment front, only 11% individuals invest their money. The corresponding figures for women and men are 8% and 13% respectively, highlighting the lower financial decision making power for women in India. Looking at the saving-investment relationship, only 15% of all savers invest their money. This conclusion is corroborated by the relationship between financial literacy and investment, which shows that only 16% of financially literate individuals invest. This is indicative of low awareness regarding investment products and services, and the inability of products to meet the requirements of the clients. Interestingly, yet again, 39% of mobile money users are shown to also be purchasers of insurance products, as opposed to 10% of non-users.
Improving financial literacy going forward
The role of technology must be leveraged to expand access and improve the quality of financial products, especially insurance and investments. With the JAM trinity and the Jio revolution expanding mobile phone penetration and internet coverage, generating awareness about such products, and undertaking efforts to improve them in order to cater to the needs of the different segments of the population, are essential going forward.
Savings is uniform across gender, while men constitute the larger consumer segment for insurance and investment products. 54% of all financially literate individuals save, while only 43% of financially illiterate individuals save. Similarly, financial literacy is positively correlated with being users of insurance and investment products, compared to those who have little or no financial literacy.India is making substantial inroads into enhancing financial inclusion, with efforts made by the government, financial providers, and other actors such as technology enablers. Although considerable progress has been made in the last three years, the challenges going forward are numerous, often in the form of deep-rooted barriers such as the gender divide, reliance on the informal market, and extremely low levels of literacy. Aside from these barriers, some key growth drivers that need to be leveraged include: investing in womens access to and use of mobile phones, promoting digital financial services alongside the development of digital infrastructure and digital literacy modules, and the importance of social protection schemes that serve to reduce vulnerability among marginalized groups and strive to change historical barriers to inclusion.
Financial inclusion is a driver of womens economic empowerment in particular, which in turn facilitates greater inclusion. It also helps address other barriers to inclusion such as unpaid work. According to an Innovations for Poverty Action (IPA) study, women disproportionately experience poverty due to social structures promoting unfair labour division and a lack of access to resources. By leveraging the ongoing digital financial revolution, not only can womens financial inclusion and empowerment be increased, but a big step will be taken towards a more financially and digitally inclusive India.
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