Banking or Under-banking

 - International Journal of Rural Management

Individuals can use financial services to smooth their consumption, absorb unforeseen shocks and make household investments. While much received work on financial inclusion focuses on its benefits for individuals, it is also useful to the economy at large. Greater access to accounts can result in a larger deposit base for banks or one that is more resilient in times of financial stress. Globally, about 2.5 billion people are unbanked, though the unbanked number has come down to 1.3 billion in 2017.


Supply-side factors point to insufficient progress in branching or outreach, while demand-side factors emphasise distrust of financial institutions, varying financial behaviour and insufficient financial literacy. The financial market in the emerging countries has remained underutilised due to the information gap between consumers’ financial service providers arising out of financial illiteracy. To bridge the gap in information asymmetry, the Reserve Bank of India (RBI) has launched an initiative in 2007 to establish Financial Literacy and Credit Counselling Centres throughout the country. But how does higher financial literacy translate into greater wealth for an individual?

Financial literacy has been proven to affect both saving and investment behaviour, and debt management and borrowing practices and also higher financial literacy are more likely to lead to planning for retirement, probably because they are more likely to appreciate the power of interest compounding and are better able to do calculations. In the context of India, financial literacy varies state- and district wise. The level of financial literacy can be inspected using financial knowledge, financial behaviour and financial attitude (OECD 2011).

Our article contributes to literature by providing in-depth analysis on the order choice of agents for financial inclusion process and evolution of the financial inclusion in India. It also contributes to the existing literature on macro-behaviour arising out of agent’s micro-motives in a distinct way. We see the impact of technology adoption and spatial inclusion explained in methodology section in detail. We find a negative relationship between supply-side constraints and usage of banking services, suggesting low access to financial services in time and space, which stands as a hindrance in financial inclusion. Financial inclusion is not evenly distributed throughout the country, and hence, it is subject to considerable spatial inequalities. Cartographic representations and symbol maps enable us to visualise the extremely heterogeneous situation of financial inclusion.

Financial inclusion in India is defined ‘as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as the weaker sections and low-income groups at an affordable cost’ (Rangarajan Committee 2008). In 2014, the country was host to the world’s largest financial inclusion intervention called the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, which was the latest, and undoubtedly largest, intervention in a long list of reforms aimed at increasing financial inclusion. Financial inclusion in India is now mandated, that opens up new challenges for getting bank accounts to the poor. Having access to a banking account generally qualifies a household or individual to be designated as financially included. Individuals with bank account ownership has witnessed a huge structural change in India, starting at 35% bank account ownership in 2011 to 80% ownership in 2017 (World Bank 2017).

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