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Banking services and financial inclusion in India’s poorest regions

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Abstract

Financial inclusion involves providing suitable products and services to meet transactional, payment, savings, credit, and insurance needs. While India has progressed in financial inclusion, challenges persist in low-income regions and among marginalised groups. This study assesses the National Strategy for Financial Inclusion (NSFI) 2019–2024 and its potential to address such challenges in Bihar, one of India’s poorest states. Field inquiries and interviews with households and bank managers were conducted. The findings reveal that despite NSFI’s potential, unawareness, insufficient income, documentation requirements, and lack of trust in the system is persisting and factors such as- region, social groups, gender, age, education, and occupation continue to influence banking participation. So, the study recommends increased awareness, financial literacy, and reduced financial service costs tailored to Bihar’s needs and other low-income regions. In addition, strengthening the regulatory framework for informal financial services is suggested.

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Notes

  1. For persons of 15 years or above and the bank account is in a formal financial institution or mobile money providers.

  2. Tier-2 cities in India are urban areas that are considered to be smaller and less developed compared to tier-1 cities. These cities typically have a lower population and lesser infrastructure and amenities compared to the major metropolitan cities. Some examples of tier-2 cities in India include Ahmedabad, Jaipur, Lucknow, Pune, Surat, Nagpur, Bhopal, Vishakhapatnam, Indore, and Chandigarh.

  3. While people can choose any bank branch, our discussions with respondents revealed a preference for their neighbourhoods. In addition, people held bank accounts in public and private sector banks, but there was a preference for public ones. One respondent expressed this preference: "The account opening process in private banks is convenient, but the maintenance costs are high, which becomes burdensome for us".

  4. Government of Bihar subgroups Other Backward Classes (OBC) into Backward Classes (BC) and Extremely Backward Classes (EBC).

  5. SC-Mahadalits are the most marginalised social group in landholding, housing, assets, and living amenities.

  6. Indira Awas Yojana (presently, Pradhan Mantri Awas Yojana) is a Government of India Scheme to provide financial support to build houses in rural India. The scheme is targeted to all rural poor living below the poverty line.

  7. See: https://www.worldbank.org/en/news/feature/2013/03/27/banks-community-institutions-partner-create-sustainable-financial-inclusion-bihar-india.

  8. See: https://www.ilo.org/empent/areas/social-finance/WCMS_737729/lang--en/index.htm.

  9. See: https://www.cgap.org/blog/how-social-norms-for-men-restrict-womens-financial-inclusion.

  10. See: https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=929.

  11. See: https://www.uncdf.org/article/8180/how-can-savings-products-work-for-low-income-women-entrepreneurs-in-developing-countries-observations-from-exploratory-research-in-india.

  12. See: https://www.pmjdy.gov.in/scheme.

  13. See: https://thewire.in/economy/jan-dhan-three-need-linking-financial-inclusion-socioeconomic-development and https://www.pib.gov.in/PressReleasePage.aspx?PRID=1854909.

  14. See: https://static.pib.gov.in/WriteReadData/specificdocs/documents/2022/aug/doc202283097701.pdf.

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Acknowledgements

I am grateful to Professor Udaya S. Mishra at the International Institute for Population Sciences, Mumbai, and Dr. Upasak Das, Presidential Fellow (Academic) in Economics of Poverty Reduction at Global Development Institute, University of Manchester, United Kingdom, for their guidance on field survey design and comments on the first draft. Their insights and suggestions have been invaluable in shaping this work. I am also grateful to the many people who participated in the field survey and shared their experiences.

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  1. Centre for Development Studies, Thiruvananthapuram, Kerala, 695011, India

    Indrajeet Kumar

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Kumar, I. Banking services and financial inclusion in India’s poorest regions. J Bank Regul (2023). https://doi.org/10.1057/s41261-023-00224-9

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