Financial inclusion: Accounting for bank accounts

09 Jul 2022

Opinion: Mridul Saggar

In China 82% of adults made a digital merchant payment using a mobile phone. In India the figure is just 8%. In China 38% of adults have credit cards. In India only 5% do. Is the lower per-capita income – and therefore higher default risks – sufficient to explain this?

On June 29 the World Bank released its 2021 Findex Report. Launched in 2012 this database has become the most extensive source for measuring progress on financial inclusion and the barriers to it. While it may have data problems given the mammoth exercise if used with understanding and cross-checks it provides insights on improving financial reach of those for whom formal finance is not easily accessible.

The latest report highlights the fact that despite the pandemic disruption financial inclusion has improved due to digital payments. However it underplays the current underutilisation of digitalisation. In developing economies only 18% of adults paid utility bills directly from an account. That a third of them did so for the first time after the onset of the pandemic shows the potential. 61% of 15-year-old-plus Indians who made a digital in-store merchant payment did so for the first time after Covid started. But only 7% of adults actually made digital in-store payments.

In China 82% of adults made a digital merchant payment using a mobile phone. In India the figure is just 8%. In China 38% of adults have credit cards. In India only 5% do. Is the lower per-capita income – and therefore higher default risks – sufficient to explain this?

The Findex Report speaks volumes of the potential to reduce supply-chain disruptions and arrest the fall in private consumption during a demand shock. No-touch payment requirements played an important role in accelerating the adoption of digital payments.

But the headline Findex number appears to show a regress in India’s financial inclusion over the last four years. The percentage of India’s adult population having a bank account has apparently dropped from 80% in 2017 to 77% in 2021 – a decrease of 8 million-odd accounts. Of this 5 million could be accounted by the demographic shift caused by the reduction in the 65-year-old-plus population. The rest could be due to sampling and non-sampling errors greater digitisation use of mobile service accounts and overestimation of population due to Covid excess mortality.

But there is no cause for worry. According to data reported by banks under the Pradhan Mantri Jan Dhan Yojana (PMJDY) during 2017-21 the number of beneficiary accounts increased by 13.4 million 11.4 million of which have been opened in rural or semi-urban branches. The deposits in PMJDY accounts have doubled in four years. RuPay debit cards have increased by over 8 million in the same period. So financial inclusion is very much working on the deposit side.

What is lacking is the use of accounts to make deposits and credit reaching those getting financially included. Findex shows that while 45% of adults borrowed money only 12% borrowed it from financial institutions. On the deposit side the data shows that though 77% had an account with financial institutions only 29% of them made a deposit in them with 35% of accounts being inactive.

Banks in India are instructed to treat accounts as dormant if there are no transactions in the account for over two years. Efforts are made to unearth these inoperative accounts. But about ₹1.5 lakh crore of unclaimed amounts lie with financial firms. Similarly unclaimed dividends are a problem. In the interim they are being used to further depositor and investor awareness. The good news is that the gender gap in terms of accounts with financial institutions has vanished. 77% of adult men as well as women now have an account. In 2011 these numbers were 44% and 26% respectively.

However India must not fall prey to self-laudatory references on financial inclusion. There are still miles to go. Nearly 300 million adult Indians still do not have an account. Although Telecom Regulatory Authority of India (Trai) data show that 60% and 54% of the population are internet and mobile users respectively Findex finds that only 28% adults in India have access to the internet. Though 66% of adults own mobile phones only 6% have a mobile money account. These numbers are distinctly lower than the average for other low middle-income countries to which India belongs.

There is a case for increasing rural tele-density in Bihar Chhattisgarh Jharkhand Madhya Pradesh and Uttar Pradesh. While the smartphone market is getting revolutionised GoI must not lose sight of the fact that digital financial inclusion will greatly depend on producing low-cost feature phones that can still support digital payments. RBI’s National Payments Corporation of India (NPCI) and NITI Aayog should join forces to chalk out a blueprint. 

The writer is former executive director RBI and member Monetary Policy. Views are personal.

Published in: The Economic Times, 09 Jul 2022