Why Has Financial Inclusion of Marginalized Communities in India Been Slow?

In recent years, India has launched several ambitious government schemes and digital banking initiatives aimed at bringing the unbanked population into the formal financial fold. However, despite these well-intentioned efforts, the financial inclusion of marginalized communities in India remains sluggish. While on paper, government schemes like Jan Dhan Yojana, Aadhaar-linked services, and digital banking promise to empower the disadvantaged, the ground reality tells a more complicated story.

Government Initiatives and Their Impact

The launch of the Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2014 was a landmark initiative, aiming to provide every household with access to financial services such as a bank account, credit, insurance, and pensions. As of 2023, over 500 million accounts have been opened under this scheme. Additionally, the rollout of Aadhaar for digital identity verification and mobile banking services was expected to revolutionize access to financial services by eliminating barriers such as identity proof and geographic limitations.

Despite these efforts, the results have been less than stellar. While account openings have surged, usage and access remain limited. Many accounts under Jan Dhan Yojana remain dormant or see minimal activity. According to a World Bank report, nearly 25% of accounts opened under the scheme show no transactional activity, indicating that the mere availability of financial services doesn’t equate to meaningful financial inclusion.

The Persistent Gap Between Policy and Access

One of the core reasons for this slow progress is the disparity between policy objectives and the ground realities of marginalized communities. Several factors contribute to this gap, including:

1. Digital Divide: Even though mobile banking and digital payments have grown, a large section of marginalized communities lacks access to smartphones or stable internet connectivity, making it difficult for them to leverage these services. According to the Telecom Regulatory Authority of India (TRAI), smartphone penetration is around 52%, but in rural areas, it drops significantly. Digital illiteracy further complicates the use of financial technology.

2. Trust Deficit: Many marginalized individuals remain hesitant to trust formal financial institutions, often due to past experiences with exclusion or complex bureaucratic processes. A significant portion of India's population continues to rely on informal lending networks or self-help groups, which are perceived as more accessible and less intimidating.

3. Geographical Barriers: Despite digital banking's potential to transcend geography, India's vast rural landscape poses significant challenges. Many rural regions lack adequate physical banking infrastructure. A NABARD report states that even though more than 80% of villages have some form of banking correspondent, access to full-service branches or ATMs is still scarce, particularly in the most remote areas.

4. Limited Financial Literacy: Understanding and managing financial services is another major hurdle. A large portion of the marginalized population lacks the financial literacy required to utilize even the most basic banking services. According to the Global Financial Literacy Survey, only 24% of the Indian population is financially literate, and the figures are even lower among marginalized groups, women, and rural communities.

5. Gender Disparities: Women from marginalized communities face additional barriers to financial inclusion. Cultural norms, restricted mobility, and the gender gap in education contribute to women's lower participation in formal financial services. The Global Findex Report 2021 revealed that only 67% of women in India have access to a bank account, compared to 83% of men, a significant gap that needs attention.

 Illustrating the Financial Inclusion Gap

Data highlights the disparity between the intent of financial inclusion policies and the actual access to these services. The World Bank's Global Findex Database 2021 shows that while 80% of Indian adults now have a bank account, only around 35% of these accounts are actively used for transactions like savings, credit, or insurance.

Moreover, the Financial Inclusion Insights (FII) survey from 2022 found that only 20% of marginalized households have access to formal credit, relying instead on informal and often exploitative credit systems. This illustrates that while digital accounts are being opened, they are not translating into increased credit or savings activity among the most vulnerable.

Bridging the Gap: What Needs to Be Done?

To close the gap between policy and actual access to financial services, India must take a more holistic and localized approach to financial inclusion:

1. Improve Digital Infrastructure: Expanding internet connectivity in rural areas and enhancing digital literacy programs will be critical to bringing more people into the digital banking ecosystem. Partnering with telecom companies and financial institutions to offer low-cost smartphones and data packages could also help.

2. Culturally Sensitive Financial Literacy Programs: Tailored financial literacy campaigns in local languages and dialects could foster better understanding and trust in formal banking systems. These programs should particularly target marginalized groups, including women, and use both digital and on-ground outreach strategies.

3. Strengthen the Role of Banking Correspondents: Banking correspondents play a crucial role in extending financial services to the last mile. Expanding their scope and training them in digital financial services could help bridge the gap between banks and marginalized populations.

4. Gender-Sensitive Financial Policies: Policies must focus on increasing women’s access to financial services. Initiatives like offering easier access to microfinance or creating women-led self-help groups with bank linkages could empower women from marginalized communities financially.

5. Bridging Formal and Informal Finance: Recognizing the role of informal financial networks and integrating them with formal financial services through policy interventions could help build trust and smooth the transition for marginalized communities.

The slow pace of financial inclusion in India’s marginalized communities underscores the need for a more inclusive, trust-building, and technologically accessible approach. Government schemes like Jan Dhan Yojana and digital banking initiatives are only the first steps in the journey. The real challenge lies in ensuring that marginalized communities not only have access to financial services but can also actively use them to improve their livelihoods. A stronger focus on addressing the digital divide, improving financial literacy, and creating a financial ecosystem that understands and caters to the unique challenges faced by these communities is essential for truly inclusive growth in India.

By overcoming these barriers, India can pave the way for an inclusive financial system that benefits all its citizens, particularly the most vulnerable.