Financial Inclusion Index: Banking Penetration Higher, But Usage Low

By Shrija Agrawal

  • 20 Aug 2008








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According to a study by leading Delhi-based economic think tank ICRIER (Indian Council for Research on International Economic Relations), India ranks way below on an index of financial inclusion, indicating that there are opportunities for innovative business models to bring the financially excluded population to the system. Financial inclusion implies the ease of access, availability and usage of the formal financial system for all members of an economy.

ICRIER’s first of its kind Index of Financial Inclusion (see the working paper) ranks India at 29 in a list of 55 countries based on the country’s performance in banking penetration, availability of the banking services, and the usage of the banking system.

India’s ranking goes down to 50 (out of 100 countries) if one removes the banking penetration as one of the determinants from the Index. This shows that even though there is a higher banking penetration, there are inefficiencies in making these services available to the financially excluded population.

This is the first time an index of financial inclusion has been computed for India. ICRIER’s paper computes IFI values for 55 countries using the three dimensions (banking penetration, availability and usage of banking services) and also using two dimensions (banking availability and usage) for 100 countries. For lack of data, the computation has been done on the basis of numbers available for year 2004.

Based on 3-dimensional index, Spain ranks the highest, followed by Austria, Belgium, Denmark, Switzerland and Malta. These are the only five countries which belong to the high IFI group with IFI values of 0.5 or more. In one of the interesting observations in the report, most of the countries with high and medium IFI values are OECD countries.

Among the 55 countries, India ranks 31st with an IFI value of 0.155. Madagascar ranks the lowest, 55th, with IFI value 0.011. India has been ranked poorly, even below African countries like Kenya and Moracco. In the group of 100 countries for which a 2-dimensional IFI has been computed, nine OECD countries - Spain, Canada, Portugal, Germany, Austria, Switzerland, Belgium, Netherlands and Denmark - led the pack.

FI in India      

Financial Inclusion in India can be thought of in two ways. One is exclusion from the payments system - i.e. not having access to a bank account. The second type of exclusion is from formal credit markets, requiring the excluded to approach informal and exploitative markets.

According to the Reserve Bank of India, businesses developed around FI have a huge potential as FI imparts formal identity, provides access to the payments system and to savings safety net like deposit insurance. Hence FI is considered to be critical for achieving inclusive growth; which itself is required for ensuring overall sustainable overall growth in the country.

According to the Economic Survey 2007-08, a large number of people especially in rural areas do not have bank accounts. Banks have been encouraged to make available  "no-frills" bank accounts with “nil” or very low minimum balances making such accounts accessible to public at large.

Investor Interest       

Financial inclusion can no longer be treated just as an outreach or social development programme. Today, it can spawn innovative business models both in the rural and urban settings and that can attract investors’ interest. One of the startups targeting financial inclusion space is Eko, which aims to extend banking facilities in untapped / unbanked areas through the use of existing branch network and new technology in combination with outsourcing.

Then there are micro finance institutions and self help groups that claim to improve financial inclusion for small and micro units. Reliance Capital, the financial services arm of Anil Dhirubhai Ambani Group, has funded two two microfinance institutions in Gujarat - MAS Financial Services and Vardan Trust. The Soros Economic Development Fund (SEDF), Omidyar Network, and Google.org hosts a ‘Small to Medium Enterprise Investment Company’ with an initial corpus of $17 million targeted at “Missing Middle” between microfinance and commercial capital markets in India. Hyderabad-based SKS Microfinance has attracted investors like Vinod Khosla, Sequoia Capital India, SIDBI and Unitus, among others.

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