Why India’s financial inclusion drive may be running out of steam

India has the highest share of inactive accounts in the world, the latest World Bank survey on financial inclusion shows

Dipti Jain
Updated25 Apr 2018
India’s share of inactive accounts, at 48%, is the highest in the world, the World Bank notes in its report based on the survey. Photo: Hemant Mishra/Mint
India’s share of inactive accounts, at 48%, is the highest in the world, the World Bank notes in its report based on the survey. Photo: Hemant Mishra/Mint

Bengaluru: Among the 10 largest emerging markets in the world, belonging to the G20 group, India today has the highest share of people with an account in a financial institution (or mobile money provider). That’s the good news from the 2017 global findex database published last week by the World Bank.

The bad news is that nearly half of those account-holders don’t use those accounts. India’s share of inactive accounts, at 48%, is the highest in the world, the World Bank notes in its report based on the survey.

As the first chart shows, India has witnessed the largest improvement in access to financial services over the past three years among peers. India improved its ranking from the seventh position among the 10 largest emerging markets in 2014 to reach the top position along with China in 2017. However, greater access to financial services has not translated into commensurate gains in use of financial services.

To be sure, the inactive accounts may not be necessarily dormant, as they may be used for long-term saving. However, the lack of use over the past year suggests that use of financial services or digital modes of payments are yet to become a regular feature in the lives of most Indians.

The overall usage of digital modes of payment rose 10 percentage points between 2014 and 2017 to 29%. Yet, this is much less than the average usage of digital payments across the 10 largest emerging markets, which stands at a little above 50%. The World Bank’s findex database is based on a survey of 150,000 people across 144 economies of age 15 years and older. In India, 3,000 people were surveyed between April and June 2017 for the latest round.

The high share of inactive accounts suggests that many beneficiaries of the Pradhan Mantri Jan Dhan Yojana (PMJDY) either don’t have money or they lack any strong incentive to use the formal banking network. Recent data from the PMJDY portal shows that the growth in average balances in Jan Dhan accounts has tapered off over the past year, after peaking in early 2017.

Nearly one-fifth of accounts under PMJDY as of December 2017 had remained unused for two years, a recent Economic & Political Weekly paper by the economists Dipa Sinha and Rohit Azad showed. Further, very few people have benefited from the overdraft facility that is supposed to be provided to the accounts under the scheme, they wrote. As of December 2017, only about 1% of account holders have been able to use the overdraft facility, data from an RTI reply cited by the authors show.

“If people are only opening bank accounts but neither have the money to save nor find actively operating bank accounts a viable option, then the claims of financial inclusion only remain superficial,” Sinha and Azad wrote.

The evidence from the findex database and the official data from PMJDY both suggest that all is not well with one of the world’s most ambitious financial inclusion initiative.

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