What is Financial Inclusion? Types and How it works?

Fintech

Feb 27, 2025

What is Financial Inclusion? Types and How it works?

Financial Inclusion, Regardless of a person's or business's size, financial inclusion refers to initiatives to make financial products and services available and reasonably priced for everybody. Financial inclusion aims to eliminate the obstacles that prevent people from engaging with the financial industry and utilizing these services to improve their quality of life.

What is a financial inclusion in India?
Example of Financial Inclusion
Types of Financial Inclusion
Importance of Financial Inclusion
How does financial inclusion work?
Challenges of Financial Inclusion
Risks Associated with Financial Inclusion

What is Financial inclusion in India?

Financial Inclusion, The practice of providing vulnerable groups, such as low-income and weaker parts, with timely and enough credit when needed at a reasonable cost is known as financial inclusion (The Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan).

Example of Financial Inclusion

Pradhan Mantri Jan Dhan Yojana (PMJDY): This scheme provides banking services to households without savings accounts. It also offers a RuPay debit card with accident insurance.

Electronic payment systems: These include Bharat Interface for Money (BHIM), Aadhaar Pay, and other e-wallets. They can be used to make payments for goods and services mobile recharges, and utility bills.

Bank on Bike: This initiative brings banking services to remote villages.

Kiosks: Kiosks are set up in unbanked villages and smart panchayats for banking.

Alternative credit scoring: This method considers non-traditional data sources, such as utility bill payments or rental history, to extend credit access.

Microcredit products can help financially weak people become micro-entrepreneurs and create jobs in their communities.

Types of Financial Inclusion:

Banking inclusion: This means ensuring people access fundamental banking services, including creating bank accounts, depositing money, and obtaining loans. It frees people from depending on unofficial and frequently costly financial services and enables them to engage in the formal economy.

Credit inclusion: The goal of credit inclusion is to give small firms and people with little credit history access to loans, particularly microloans, which are frequently backed by alternative credit scoring models.

Insurance inclusion: Insurance inclusion guarantees that low-income groups have access to reasonably priced insurance products, including life and health insurance as well as microinsurance for disadvantaged communities.

Payment inclusion: Payment inclusion encourages cashless transactions by allowing people to send and receive money using digital wallets or mobile money.

Saving inclusion: Access to digital savings tools and savings accounts that assist people in achieving financial security is guaranteed by savings inclusion.

Digital financial inclusion: Digital financial inclusion leverages fintech tools like peer-to-peer lending and mobile money to extend services to those without access to traditional banking.

Geographical inclusion: By providing branchless banking, mobile agents, and agent networks, geographic inclusion aims to reach underserved areas and guarantee that even people living in remote areas may access financial services.

The Importance of Financial Inclusion in India

A reduction in systemic poverty:

The decrease in poverty is the most obvious and significant advantage of financial inclusion, albeit this list is not in any particular order.
Increasing financial inclusion has proven especially successful in combating extreme, systemic poverty, which frequently occurs in areas that financial institutions have long disregarded or underestimated.
It makes sense: if you provide people with financial tools that can increase and safeguard their wealth, they will utilize them, and if they do, they will do so.
There is a wealth of empirical evidence supporting this. Several research shows that poverty rates are correlated with greater financial inclusion.
Experts from Brazil's Federal University of São Carlos and Universidade Paulista carried out one such noteworthy study.

Financial Security:

Access to fundamental financial services, including bank accounts, health insurance, retirement plans, and more, is what we mean when we discuss financial inclusion.
What is the connection between all of these things? People in more affluent regions have long taken for granted the degree of financial stability they offer.
The World Bank Group defines financial security as "financial resiliency". Compared to their colleagues who depend on personal loans or other unofficial arrangements to pay emergency expenses, people who have access to formal financial services are significantly more resilient.
People can build emergency savings and save for the future by using the wealth storage services that banks offer.

Generation Wealth:

Any valuable assets that are passed down from one generation to the next are referred to as generational wealth.
The most well-known type of generational wealth is inheritance, but other notable instances include acquiring a family car or financial assistance from your parents to attend college.
Creating the underlying wealth is a prerequisite for creating generational wealth. According to IMF Deputy Managing Director Mitsuhiro Furusawa, being part of the financial system translates into more economic potential.
After acquiring that wealth, you must have the resources to preserve it and, preferably, increase it through investments or accounts that yield increased Government Investment in Aid Initiatives
It makes sense that anything that reduces poverty would also result in less money being spent by governments on economic assistance.
In 2023, the US government spent $522 billion (about 8% of the total budget) on economic security programs, however, government spending on aid programs varies greatly from nation to nation. Any decrease in that sum should, in theory, result in financial savings for taxpayers.
This is among the factors that make establishing a national financial inclusion strategy (NFIS) a wise financial decision.
Coordination of financial inclusion initiatives across numerous business and governmental parties is the goal of an NFIS. The World Bank reports that more than 50 nations have established an NFIS, demonstrating their considerable success.

Reduced Government Investment in Assistance Program:

It makes sense that anything that reduces poverty would also result in less money being spent by governments on economic assistance.
In 2023, the US government spent $522 billion (about 8% of the total budget) on economic security programs, however government spending on aid programs varies greatly from nation to nation. Any decrease in that sum should, in theory, result in financial savings for taxpayers.
This is among the factors that make establishing a national financial inclusion strategy (NFIS) a wise financial decision.
Coordination of financial inclusion initiatives across numerous business and governmental parties is the goal of an NFIS. The World Bank reports that more than 50 nations have established an NFIS, demonstrating their considerable success.

Reduced economic inequality:

More than 70% of people on the planet live in nations where income disparity is increasing, according to the UN, which also claims that income inequality has gotten worse in most of the world.
For a variety of reasons, economic disparity is detrimental, and economists are looking for answers.
A large body of research suggests that financial inclusion is a good solution.
Research on income disparity across 140 nations was published in the European Journal of Finance. According to their findings, inequality is decreased at all quantiles of the inequality distribution.
The same conclusion was drawn by other research, such as one that was published in the Singapore Economic Review and found that financial inclusion was "the key to tackling income inequality.

Increased Entrepreneurship:

Because it takes money to transform a good idea into a business, many good ideas end up dead on the vine.
In certain communities, seed money can be obtained through unofficial loans from friends and family, but in those that are especially poor, the formal financial sector is typically the only way to obtain reasonably priced cash.
This problem was intended to be addressed by micro-loans, which were first thought to be a panacea for poverty.
It was believed that giving small loans to unbanked, underprivileged communities to encourage business would empower and improve those communities.

Well-being of the Community

Financial inclusion has long been a component of the UN's anti-poverty initiatives.
The UN makes a clear distinction between a community's capacity to provide its people's fundamental needs and its degree of financial inclusion.
"Nutritious food, clean water, housing, education, and healthcare" are among the objectives that are more achievable for communities that are part of the financial system, according to the UN's special advocate for financial inclusion.
An excellent illustration would be sanitation services.
For service providers, constructing and maintaining sanitary infrastructure in many underprivileged communities is an expensive proposition.
Costs can be greatly reduced, though, if a community has access to mobile banking and can use digital payments instead of cash.

Economic Growth:

By making it possible for everyone, particularly the underprivileged, to participate in economic activity, financial inclusion stimulates economic growth. It encourages productivity, investments, and savings, all of which raise the GDP of the country.

Women Empowerment:

Women's Empowerment: By giving them financial freedom and raising their social and economic standing, financial inclusion empowers women. It provides them with opportunities to invest, save, and increase household income.

How does financial inclusion work?

Making financial services available to everyone, particularly underserved individuals, is known as financial inclusion. It seeks to guarantee that businesses and individuals can obtain responsible, convenient, and reasonably priced financial services.

Access to financial inclusion: A variety of financial services, such as banking, insurance, and credit, are available to both individuals and companies.

Affordability: Financial services are reasonably priced and cater to both individual and corporate needs.

Accountability: Financial services are provided in a sustainable and accountable manner.

Competition: Competition guarantees customers choice and affordability.

Regulation: Clear regulations oversee stable and secure institutions.

The Challenges of Financial Inclusion in India?

Gender inequality, poor banking infrastructure, high service fees, low financial literacy, and restricted digital connectivity in rural areas are some of the obstacles to financial inclusion in India. Fair access to necessary financial services is hampered by these obstacles.

Low Financial Literacy: Particularly in rural regions, financial literacy is still low. The underutilization of banking, credit, and insurance services is caused by the fact that many people lack the information necessary to comprehend and use financial services efficiently.

The Digital Divide Digital financial inclusion is hampered in rural and low-income areas by limited smartphone usage and internet connectivity. The adoption of online financial services, digital payments, and mobile banking is hampered by this digital divide.

Gender Disparities: Because of mobility constraints, sociocultural issues, and low financial knowledge, women have more obstacles to financial inclusion.

Inadequate Infrastructure: Digital access points, branches, and ATMs are among the crucial banking infrastructures that are frequently absent from rural and underserved areas. The availability of financial services in rural areas is restricted by this lack.

High Cost of Services: Due to high credit interest rates and other service costs, financial services can be costly for low-income populations. For those who are economically challenged, these expenses make financial access challenging.

The risk associated with financial inclusion

It may be possible to reduce poverty and promote economic progress by offering formal banking services to marginalized communities. However, for these endeavors to be successful, related risks need to be recognized and controlled.

Risks to consumer protection: Low-income customers may lack the information and comprehension necessary to make wise choices regarding the use of financial products and services when they are initially granted access to them.

This may cause individuals to become victims of fraud, dishonest lenders, or bad financial choices that ultimately cost them more. Therefore, before they are granted access, appropriate onboarding, training, financial education, high awareness, and protection measures are implemented.

Operational risks: Working with new partners and intermediaries is a common component of financial inclusion projects, which raises the possibility of fraud, legal issues, operational issues, and reputational damage. Therefore, before signing contracts, due diligence on all new partners and intermediaries must be done.

Strategic risks: There is always a chance that not all financial inclusion programs will be successful, just like with any new endeavor. This may be the result of bad market timing, erroneous target market selection, irrational expectations, significant regulatory changes, and insufficient preparation and execution. Therefore, before starting any financial inclusion project, it is imperative to take all of these variables into account.

Financial risks: Because of a lack of information or resources in some regions or nations, banks may not be able to determine with accuracy whether borrowers can make regular payments on loans or mortgages. Both lenders and borrowers may suffer greatly if borrowers default because it may result in larger loan losses for lenders, who may then raise interest rates to cover their losses.

Conclusion - Financial inclusion

Financial inclusion, The process of guaranteeing that everyone, particularly the disadvantaged groups, has access to adequate and reasonably priced financial services is known as financial inclusion. By providing them with resources like digital payment methods, credit, insurance, and savings accounts, it hopes to enable people to manage their money, engage in the formal financial system, and develop economic resilience.

FAQs: Financial inclusion

What is meant by financial inclusion?

Financial inclusion means providing all people and businesses, regardless of size or net worth, with access to practical and reasonably priced financial goods and services responsibly and sustainably is known as financial inclusion.

What is financial inclusion in RBI?

Financial inclusion, according to the RBI, is the process of guaranteeing vulnerable populations have fair, transparent, and reasonably priced access to the right financial products and services.

What are the 4 pillars of financial inclusion?

The six pillars of financial inclusion are Universal Access, Basic Services, Access to Livelihood, Financial Literacy, Customer Protection, and Effective Coordination among stakeholders

What are the 4 P's of inclusion?

The 4 P's of Diversity & Inclusion: Being Present, Proactive, Persistent and Passionate.

What are the 4 C's of financial management?

The 4 C's are key financial indicators that determine financial health: cash flow, credit, customers, and collateral.

Financial Inclusion Schemes in India?

Pradhan Mantri Jan Dhan Yojana (PMJDY)
Atal Pension Yojana (APY)
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
Stand Up India Scheme.
Pradhan Mantri Mudra Yojana (PMMY)
Pradhan Mantri Suraksha Bima Yojana (PMSBY)
Sukanya Samriddhi Yojana.
Jeevan Suraksha Bandhan Yojana.