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Financial Inclusion Index for India*

Financial Inclusion Index for India ARTICLE. Financial Inclusion Index the economy and weaker sections of the population. This was accompanied by various initiatives over for India* the years such as expansion of branch network, Greater Financial Inclusion (FI) is crucial for a wider, introduction of Priority Sector Lending (PSL), launch inclusive and sustainable growth. Therefore, a measure of Lead Bank Scheme, promotion of Self-Help of FI is necessary to effectively monitor the progress Groups (SHGs) and Joint Liability Groups (JLGs), of the policy initiatives undertaken to promote FI. A implementation of Business Correspondents (BC). multidimensional composite Financial Inclusion Index model, among others. The brick and mortar branches, (FI- Index ) has been constructed based on 97 indicators complemented by the BC model have spread the reach which quantifies the extent of Financial Inclusion and is of the banking system to every nook and corner of the responsive to availability, ease of access, usage, unequal country.

financial inclusion in a single number ranging between 0 and 100 - where 0 represents complete financial ... national, regional, and district levels. Findex database (Demirguc-Kunt and Klapper, 2012) published by the . ARTICLE RBI Bulletin September 2021 91 Financial Inclusion Index for India World Bank every three years beginning 2011, is based

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Transcription of Financial Inclusion Index for India*

1 Financial Inclusion Index for India ARTICLE. Financial Inclusion Index the economy and weaker sections of the population. This was accompanied by various initiatives over for India* the years such as expansion of branch network, Greater Financial Inclusion (FI) is crucial for a wider, introduction of Priority Sector Lending (PSL), launch inclusive and sustainable growth. Therefore, a measure of Lead Bank Scheme, promotion of Self-Help of FI is necessary to effectively monitor the progress Groups (SHGs) and Joint Liability Groups (JLGs), of the policy initiatives undertaken to promote FI. A implementation of Business Correspondents (BC). multidimensional composite Financial Inclusion Index model, among others. The brick and mortar branches, (FI- Index ) has been constructed based on 97 indicators complemented by the BC model have spread the reach which quantifies the extent of Financial Inclusion and is of the banking system to every nook and corner of the responsive to availability, ease of access, usage, unequal country.

2 However, the inflection point in the journey distribution and deficiency in services, Financial literacy, to greater FI was reached with the launch of Pradhan and consumer protection. In a scale of 0 to 100, the Mantri Jan Dhan Yojana (PMJDY), under which a large annual FI- Index , with three sub-indices viz., Access', number of accounts of hitherto excluded population Usage', and Quality' computed for 2021 stood at , were opened in a time-bound manner, and with the driven largely by Access sub- Index which stood at evolution, promotion and adoption of digital channels reflecting substantial progress so far in creating Financial in recent years. infrastructure in the country through combined efforts of The Jan Dhan, Aadhaar and Mobile (JAM) eco- all stakeholders.

3 System has brought about a major shift in the field of We must continue our efforts for greater Financial Inclusion and several initiatives have been Financial Inclusion in pursuance of the goal of taken to universalise digital payments in a convenient, sustainable future for all safe, secure, transparent and affordable manner. Given Shaktikanta Das, July 20211 the latent potential of harnessing value at the bottom of the pyramid, a large number of players are active in I. Introduction the field, ranging from commercial banks, cooperative Access to finance has always been considered as banks, Non-Banking Financial Companies (NBFCs), one of the vital parameters of economic growth, and niche Financial entities such as payments banks, small therefore, the promotion of an inclusive Financial finance banks, micro finance institutions (MFIs) and system is an area of policy thrust and priority.

4 In fintech companies. Greater focus is also being given the post-independence period, mainstream Financial to addressing the needs of the vulnerable segments Inclusion journey of the country can be traced of the economy and population, while paying back to the promotion of cooperatives in 1950s, attention to consumer protection and enhancing nationalisation of major commercial banks in 1960s capacity of customers to undertake responsible and and channelising the credit to the neglected sectors of sustainable use of Financial services. Taking this * forward, the National Strategy for Financial Inclusion This article is prepared by Anil Kumar Sharma, Executive Director;. Sonali Sengupta, CGM-in-charge; Indrajit Roy, Director; and Sushmita 2019-2024 (NSFI) and National Strategy for Financial Phukan, GM Financial Inclusion and Development Department.

5 Education 2020-2025 (NSFE) provide a road map for 1 Inaugural address by Shri Shaktikanta Das, Governor, Reserve Bank of India, delivered at the Economic Times Financial Inclusion Summit on a coordinated approach towards Financial Inclusion , July 15, 2021. Financial literacy, and consumer protection. RBI Bulletin September 2021 89. ARTICLE Financial Inclusion Index for India With concerted efforts for furthering Financial II. Review of Literature Inclusion , a consolidated measure of Financial Most of the studies followed a multidimensional Inclusion is necessary to effectively monitor the approach, with different set of indicators such as progress of the policy initiatives undertaken to per capita bank accounts, bank branches, ATMs, promote Financial Inclusion .

6 It is, therefore, pertinent credit/debit cards, number of household depositors/. to construct a Financial Inclusion Index (FI- Index ) borrowers (Sarma 2012; Dabla-Norris et al., 2015;. which quantifies the extent of Financial Inclusion and Mialou et al., 2017). Single indicator approach may is responsive to availability, ease of access, extent of not capture the true extent of Financial Inclusion , usage, inequality and deficiency in services, extent for example, just having a bank account may not of Financial literacy and consumer protection in the necessarily imply that the account is well utilised on formal Financial system; and captures the expansion account of physical or psychological barriers. Also, of banking, investments, insurance, postal as well as despite having bank accounts, marginally banked.

7 The pension sector. people may not be making sufficient use of formal A Task Force (TF) was constituted by Government Financial infrastructure and may be using informal of India in October 2017, wherein all the stakeholders non-bank services (Diniz et al., 2011; Kempson, 2004;. were represented, to suggest various dimensions and Seidman et al., 2005). aspects for creation of an Index of Financial Inclusion . At the institutional level, Financial Access Survey The TF submitted its report in August 2020. While (FAS) of the International Monetary Fund (IMF). the methodology suggested by the TF was retained, collects annual time series data on access and use of inter alia, a number of indicators under various sub- basic Financial services around the world.

8 The FAS was indices were added and a dimension of Quality' was launched in 2009 to collate supply side data on key introduced, in addition to determining weighting access and usage indicators under Financial Inclusion . distribution, target values, etc. The FAS, inter alia, provides information about ATMs per 100,000 population, bank branches per 100,000. Accordingly, this article dwells on the creation of population, number of depositors and borrowers per the FI- Index in terms of indicators for Access', Usage'. 1000 adults, deposit and credit as per cent of GDP, and Quality' dimensions, weighting distributions, etc. It also captures data on insurance and digital desired goals for the selected indicators, and transactions. The FAS serves as a comprehensive methodology to combine these indicators into a source of Financial Inclusion data for most of the composite Index .

9 The FI- Index , thus constructed, countries of the globe and can be used for cross captures information on various dimensions of references. CRISIL's Inclusix, first published in 2013. Financial Inclusion in a single number ranging between with next three iterations in 2014, 2015 and 2018, is a 0 and 100 - where 0 represents complete Financial composite Index that measures Financial Inclusion as exclusion and 100 indicates full Financial Inclusion . an aggregate of six parameters across four dimensions The article is divided into five sections. Section of Branch Penetration (BP), Credit Penetration (CP), II reviews some of the existing studies on Financial Deposit Penetration (DP) and Insurance Penetration Inclusion . Section III discusses the methodology (IP).

10 The Inclusix' considers district wise data adopted for the FI- Index . Section IV captures the and provides extent of Financial Inclusion at the data and outcomes; and Section V dwells on the way national, regional, and district levels. Findex database forward. (Demirguc-Kunt and Klapper, 2012) published by the 90 RBI Bulletin September 2021. Financial Inclusion Index for India ARTICLE. World Bank every three years beginning 2011, is based The indicators for the three dimensions of the on surveys of more than 150,000 adults of age 15 and Index , their optimum values and their respective above in over 140 economies on how adults save, weights were decided in further consultation with the borrow, make payments, and manage risk. respective sectoral regulators and the Government, keeping in mind their role in furthering FI.


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