A Bank Account for All

April 27, 2015

Onno Ruhl, World Bank India Country Director and Gloria Grandolini, Senior Director Finance and Management Mint

There is significant potential to further leverage technology to boost financial inclusion in India

How do you save money if you don’t have a bank account? And to whom do you turn when you desperately need a loan? Most people can’t imagine life without some kind of financial services. But a staggering one-third of the world’s population has no secure way to save money, pay bills, take a loan or obtain a mortgage. Almost a quarter of them are in India.

Access to and participation in the financial system can boost the creation of jobs, reduce inequalities in income, boost consumption, increase investments in education and help poor people cope with unexpected expenses or loss of income.

Since Independence, India has pursued a range of initiatives to wean the poor away from traditional forms of moneylending and bring them into the financial mainstream. Now, financial inclusion has become a prominent policy priority. Recently, Prime Minister Narendra Modi launched the Pradhan Mantri Jan Dhan Yojana (PMJDY), one of the world’s most ambitious initiatives to promote financial inclusion. The programme is off to a good start—within six months, nearly 125 million new bank accounts have been opened.

The programme builds on the country’s recent successes. While earlier efforts to expand financial inclusion may have fallen short of policymakers’ hopes, the more recent growth of group lending models and microfinance institutions has made it easier for the rural poor to save and take loans. Moreover, business correspondent models have helped expand the reach of financial access points, microfinance institutions have been brought under a self-regulatory mechanism, the national payments system has been developed and strengthened, and the Unique Identification Number (Aadhaar) initiative has been rapidly scaled-up, signing on new customers and authenticating them to make transactions more efficient. The recent establishment of small banks and payment banks is also a clear step forward.

Nonetheless, significant potential exists to further leverage technology to boost financial inclusion. Already, direct cash transfers into beneficiaries’ Aadhaar-linked bank accounts are starting to plug leaks and promoting the cost-effectiveness of social benefit schemes. Expanding the use of Aadhaar to banks, insurers, post offices, non-banking financial companies, microfinance institutions, cooperatives and mutual funds can boost these efforts considerably.

The rich dataset of transactions that such expansion will yield can help develop new financial products for households and small businesses. For example, data on individual patterns of saving or timely repayment records in a credit bureau can substitute the requirement for collateral assets or guarantees, making it easier for institutions to offer loans, insurance or micro-investment products to underserved segments of society. Traditional channels such as cooperative banks, post offices and rural financial institutions too can play a greater role.

India can also take advantage of the developments in mobile telephony. With more than 870 million active mobile subscribers, India can expand financial inclusion by promoting mobile financial services. For instance, mobile money can help eliminate ad hoc means of transferring money that are expensive, unreliable and prone to theft. It can complement the 425 million debit and credit cards currently in use in India and target the 150 million RuPay cards linked to PMJDY accounts, of which 110 million have already been issued. For these models to work, however, they must ensure commercial viability for the banks, banking correspondents and others providing needed services.

Ensuring women’s access to resources is equally critical. Although microfinance has successfully linked many women to mainstream financial services, most women-owned micro, small and medium enterprises (MSMEs) continue to remain underserved by formal institutions—only about 3% of the country’s 3 million such enterprises have formal financial access.

A robust system is also needed to ensure consumer protection and build depositors’ trust in and understanding of the system. While efforts are on to continue to expand financial services, the suitability of the products on offer and the financial capability of clients are also being emphasized, helping create confidence among new customers that their money is safe.

Globally, the goal is to achieve financial access for all by 2020. World Bank Group president Jim Yong Kim and Queen Máxima of the Netherlands—the UN secretary-general’s special advocate for inclusive finance for development—have urged countries to make a concerted effort in this regard.

To achieve this goal, however, financial systems worldwide must embrace ambitious reforms and adopt new technologies along with transformative business models. The private sector can help by driving innovation, while social institutions can be pivotal in contributing ideas, talent and seed funding.

The success of PMJDY can indeed be a model for other countries. India is already providing leadership and spurring innovations. Recently at the World Bank’s headquarters in Washington DC, Reserve Bank of India governor Raghuram Rajan and State Bank of India chairperson Arundhati Bhattacharya shared their insights on India’s successes, the priorities that lie ahead and the challenges that remain.

On its part, India too can benefit from the wealth of experience garnered by other countries in promoting financial inclusion. Being home to one-third of the world’s poor living on less than $1.25 a day, India’s success will be key if we are to achieve universal financial access by 2020.


Onno Ruhl is the World Bank’s country director for India. Gloria Grandolini is the World Bank’s senior director for finance and markets global practice.

This opinion piece was originally published in Mint on 27th April, 2015.