Synopsis: This article discusses the current state of the Indian lending landscape and examines the key issues plaguing the advancement of equity and equality in financial inclusion. 

Financial inclusion, which encompasses access to and usage of financial services, is the springboard that propels marginalized individuals from the sidelines to the center stage of economic growth and prosperity. As an enabler of at least seven sustainable development goals (SDGs), financial inclusion is a critical driver for achieving poverty alleviation, gender empowerment, and sustainable, inclusive economic development. 

Providing equal access to credit is no longer enough to address concerns about financial exclusion. Instead, achieving meaningful financial inclusion requires equitable access to a bouquet of financial services, including savings, pensions, insurance, remittances, and loans. It must address the underlying disparities that exist among different dimensions of the Indian population. 

So, how does the interplay of equity and equality play out in promoting financial inclusion? 

Equity vs. Equality: Understanding the Difference 

Financial equality advocates for the equal provision of services to all population segments. Equity further builds on the concept of equality by supporting the delivery of financial services on a “fair basis,” where the populace’s requirements, geographic disparities, gender roles, and end goals have been accounted for. At its heart, equity ensures that people get the services they exactly need to achieve an equal outcome. 

However, realizing equity and equality in financial inclusion is a complex task. The vast diversity of Indian society has birthed several population segments that lack access to basic financial services due to socio-economic and geographic differences. 

Status of Equity in the Financial Inclusion Landscape 

Financial exclusion of certain sections—poor households, rural populations, women, and caste-marginalized groups—imposes humongous opportunity costs, forcing them into a vicious cycle with no escape.  

The All India Debt & Investment Survey 2019 reports that over 10.2% of rural households continue to be indebted to non-institutional creditors that offer expensive and insufficient lending services, compared to 4.9% of urban households. This geographic exclusion can be explained by the lack of proper infrastructure—a fact emphasized by the RBI’s Financial Inclusion Strategy 2019–2024 report—and the inability to negotiate better terms with formal lenders due to a lack of collateral and poor credit scores. 

While there is no gender gap in terms of account ownership, the use of these accounts tells a different story. The Global Findex 2021 report shows over 35% of these accounts are inactive, seven times higher than the developing world average. Moreover, there is a 13% difference in digital payment use between men and women. 

Additionally, only 28% of women save their money in an account, compared to 41% of men. Women continue to exhibit low financial resilience, as showcased by the 14% gap among those accessing emergency funds without major constraints.  

The cause of financial inclusion further regresses due to the social exclusion suffered by various communities. A study found that the odds of women belonging to Dalit communities getting a loan were lower compared to other women with similar credit scores but belonging to higher castes. Such marginalized communities also display lower financial literacy rates, further impeding their access to affordable finance. 

Barriers to Achieving Equity in Financial Inclusion  

Despite the phenomenal growth in account ownership due to the Pradhan Mantri Jan Dhan Yojana, 22% of Indians remain unbanked, stalling the financial inclusion story. There are several reasons for this: 

1. Lack of infrastructure: 43% of Indian adults state that banks are located at a considerable distance, making availing of financial services a tall task, especially for those in rural hinterlands, remote locations, and hilly areas. Additionally, fewer than 10% of business correspondents are women, limiting women’s credit access. While engineering-driven fintech lenders like Protium have cleared this roadblock to an extent, there is scope for more. 

2. Systemic issues and biases: Women and Dalits continue to be sidelined as they face multiple cultural and societal barriers that perpetuate inequality. The lack of property titles, poor financial literacy, and restricted mobility turn them into high-risk propositions for formal lenders, inhibiting their economic and social progress. In fact, only 1% of rural women are insured, with only 29% aware of insurance products, highlighting poor penetration of financial services.[Text Wrapping Break] 

3. Unsuitable financial products: Traditionally, banks have followed a one-size-fits-all approach to offering their services without any regard for context-based personalization. Socially and financially excluded communities have specified needs, such as small loans or limited documentation, that must be addressed to further financial inclusion. 

Strategies for Promoting Equity and Equality in Financial Inclusion  

Historically, it was the self-help group (SHG) movement that took the lead in promoting financial inclusion in India. Being closer to the underserved population and privy to their specific concerns, SHGs have made bigger inroads among the rural poor. Microfinance institutions further solidified their work. 

However, what truly led to a massive transformation in the financial inclusion landscape was the government’s JAM policy—a trifecta of Jan Dhan Yojana (PMJDY), Aadhaar authentication, and mobile connectivity. To date, over 49 crore beneficiaries have opened bank accounts, and over 33 crore have been issued Rupay cards to make transactions. 

Several other government schemes, such as Stand Up India, have sanctioned over Rs. 40,700 crore in loans to women, SC, and ST categories, while Pradhan Mantri Mudra Yojana (PMMY) has increased access to collateral-free loans for entrepreneurs and MSMEs. Vulnerable households have also been granted social protection under health insurance and pension schemes, namely the Ayushman Bharat Yojana and the National Pension System, among others. 

Marginalized sections, including women, have also benefited from direct benefit transfers (DBT), which cover over 319 schemes. Numerous women-targeted interventions such as WEP, Stree Shakti, and Udyogini schemes have advanced the cause of women’s entrepreneurship. The RBI has further strengthened infrastructure by licensing payment and small finance banks that cater to the unserved populace and running various financial literacy programs. 

The advent of digitization in conjunction with the establishment of India Stack, the Account Aggregator Framework, TReDS, and the Public Credit Registry has enabled fintechs to offer bespoke financial services to thin-file creditors and underserved sections. With banks and new age financial institutions adopting advanced servicing models using agile technology and embedded finance gaining popularity, India is inching one step closer to achieving financial inclusion. 

Bottom Line: Paving the Path to a Financially Inclusive India 

The pursuit of financial inclusion in India necessitates a collaborative approach between policymakers, financial institutions, civil society organizations, and individuals that recognizes the interplay of equity and equality. 

At Protium, we are deeply committed to addressing the distinct needs of Bharat’s unserved and underserved small businesses and consumers that contribute to 80% of the country’s GDP. While technology has expanded access to affordable financial services, the integration of physical channels is essential for seamless last-mile connectivity. 

Enhancing credit access is not enough; rather, there is a need to address the underlying disparities that hinder inclusivity. 

All stakeholders must focus on the individualized needs of the marginalized and vulnerable sections to make policy decisions and promote evidence-based, targeted initiatives. Fillip must also be given to financial innovations, including AI/ML-based lending that overcomes social and geographical barriers, augmenting financial inclusion.