For meaningful financial inclusion, we need clear metrics

Photo: Mint
Photo: Mint


RBI’s index puts too little in the public domain for its readings to serve the purpose of closing gaps

On 17 August, the Reserve Bank of India (RBI) unveiled its newly conceptualized Financial Inclusion Index. The intent was to “capture the extent of financial inclusion across the country". But just two numbers were announced: the index stood at 53.9 for the period ending March 2021, as against 43.4 for the period ending March 2017. The press release had scant information on the index; 97 indicators were used to make this index across three broad parameters: Access (35%), Usage (45%) and Quality (20%), with their respective weightage in the index mentioned in brackets. There is no base year. But 0 measures complete financial exclusion and 100 indicates full financial inclusion. At a conceptual level, this index aims to capture much more than the single table measuring the country’s progress on financial inclusion in RBI’s Annual Report.

In September, the RBI Monthly Bulletin obliged us with an article that gave the methodology and some more details on the index. As the index looks beyond just banking services to include insurance, pension and digital payments, the approach taken for financial inclusion is broader than mapping progress under Financial Inclusion Plans. Of the three categories, Access, Usage and Quality, as expected, there has been more progress on Access, with Usage lagging the most. Over the period March 2017 to March 2021, the Access sub-index rose from 61.7 to 73.3; the Usage sub-index moved up from 30.8 to 43, and the Quality sub-index had the least rise from 48.5 to 50.7. Though the 97 indicators used have not been listed in this note, it is heartening to see that inequality at the district level is being mapped as one indicator of Quality.

Why is data on financial inclusion important? Financial inclusion is among the most critical objectives for long-term equitable growth and a financially-stable economy. A country where a large proportion of its population is excluded from the financial sector, as it currently is in India, is not only not equitable but will also have a relatively weak financial sector. The larger the number of independent and heterogenous participants in the financial sector, the greater its depth, generating conditions for greater innovation and competition. Financial inclusion therefore is a policy objective with multiple benefits. Historically, however, despite significant policy and regulatory interventions in the financial sector, inclusion has been less than desirable. The recent rapid rise in access to bank accounts is just the start of a long journey ahead, with many changes required by policymakers at the central and state levels, regulators, industry, and even consumers. A good measure of financial inclusion, therefore, will help monitor and benchmark the performance of India as a whole and not just one stakeholder.

As analysts tracking financial inclusion in India since 2006, we have found that relevant data is difficult to come by. There has been a high dependence on surveys, with the World Bank Findex and Financial Inclusion Insights data giving us some idea of trends in access and usage every two years or so. However, RBI is best placed to bring out a truly comprehensive national database, as much of the needed data is already being captured by the banking system, even though it is not placed in the public domain. Given the heterogeneity of a country like India, the more granular the data, the more the insights and the easier it is to pinpoint specific issues that affect different classes of consumers in various places for appropriate solutions to be devised.

What further information could offer us a better picture of the country’s progress on financial inclusion? First, RBI should disclose details of the indicators it has used for each of the three categories, Access, Usage and Quality.

Since 2014, we at the Indicus Centre for Financial Inclusion have been making a case for improved metrics to track financial inclusion beyond the number of bank accounts and business correspondents, etc, to include data on active/dormant agents, usage of accounts, the quality of service/transactions, etc.

Ideally, data on each indicator should be released, as this can help service providers and India’s central and state governments focus their efforts more effectively.

Second, however useful a national number is, it masks great regional disparities in India. At the very least, we need district-level data on all indicators to understand where additional support is needed.

Third, and this is quite crucial, we need a breakup across all categories for gender at the district level. India had pledged to close the gender gap in financial inclusion by implementing the Denarau Action Plan adopted in Fiji at the 2016 Global Policy Forum. The first step towards this would lie in generating gender-wise data on financial services. Intuitively, and anecdotally, there is enough to show that India has a very wide gender gap, with some regions better than others, but there is hardly any official data. For instance, we do not know the number of active women business correspondents in each district, or how actively women customers use their bank accounts.

It is important that this data be as granular geographically as possible. Without a spotlight on current gaps, financial service providers have little incentive to frame solutions with an appropriate gender-lens.

The purpose of any data or index is to offer us pointers on moving ahead. For meaningful financial inclusion, we must have meaningful metrics in the public domain.

Sumita Kale & Laveesh Bhandari are with the Indicus Centre for Financial Inclusion

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