Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165

Digital Financial Inclusion and

Inclusive Development of India
Dr. Susanta Mondal
Assistant Professor in Economics
Bolpur College, Bolpur, India

Abstract:- An efficient financial system is a prerequisite hand poor financial literacy leads to sub-optimal decision
for a country’s socio-economic development. It acts as a making in borrowing decision, stock market participation,
building block for the mobilization of savings and and indebtedness. Expanding digital literacy is a key factor
allocating them to the productive resources. Realizing to Governments in assisting economic and social inclusion
the role of financial inclusion as an enabler of inclusive by promoting civic engagement, improving public safety
growth, the Government of India along with Reserve and increasing access to public-sector services. At the same
Bank of India have taken a number of policy initiatives time it is also beneficial for the businesses in establishing a
to include the large unbanked masses into the financial successful cloud-enabled organization that stimulates the
mainstreams. Recent development in communication creation of any innovation-driven industry.
technology can be used in a very efficient manner for
bringing the financially excluded people under the II. LITERATURE REVIEW
ambit of digital financial inclusion in a cost-effective
manner. Digital financial services have a great capacity Financial literacy is an essential component of
to support financial inclusion for inclusive economic financial capabilities which is a combination of
development. understanding, knowledge, attitude, skill and behavioral
changes, needed for the sound economic decisions that are
Keywords:- Financial Inclusion, Digitization, Mobile appropriate to their social and financial circumstances
Banking, Inclusive development. (World Bank, 2013). In the life cycle hypothesis, financial
literacy is regarded as a form of human capital required for
I. INTRODUCTION managing income between savings and consumption over a
consumer’s lifetime, to maximize his utility (Modigliani
The financial sector of any country plays a pivotal role and Brumberg, 1954). Enhanced financial literacy enables
in its economic growth and development. Financial individuals and families to have greater control over their
capability is a key factor to stability and functioning of money and helps them to take better financial decisions
financial markets. An inclusive financial sector ensures (Subha and Priya, 2014). According to Tomaskova,
availability, ease of access and usage of basic financial Mohelska and Nemcova (2011) financial literacy is the
resources to all of its citizens. For effectively use of these perfect way to prevent over-indebtedness of citizens. Poor
financial resources, financial literacy lies in the frontline. people have a natural tendency to have less interaction with
Financial literacy may be defined as a combination of a formal financial institutions and have a preference to
person’s awareness, knowledge, attitude, skill and behavior informal mechanisms (Matin, Hulme and Rutherford 2002).
necessary to make informed and effective decision in A study conducted in India by PWC (2011) found that
managing their personal financial matters. Financial digitally active customers own large product holding. In the
knowledge is regarded as a form of investment in human developing world, mobile communications are the rapidly
capital that ensures smoothen consumption over time. In growing technology and it has significant socio-economic
their model of intertemporal Consumer’s choice, Jappelli impact poor communities (Abraham, 2006). Mobile
and Padula (2011) incorporated financial literacy as a banking as a means of financial inclusion can be used as it
determining factor where the objective of the individual is is accessible to both low-income and better-off individuals.
to maximize lifetime utility against intertemporal budget The internet based mobile-banking apps are being
constraint. As a means of financial literacy, Digital increasingly used by the Indian smart phone users for
Financial Literacy (DFL) is appearing to be an important account and loan statement, fund transfer, insurance and
aspect of the present digital world. It is defined as a process portfolio management, utility bill payments etc. (D’Souza,
of acquiring knowledge, skills and enlarging necessary 2018). Digital transactions can overcome the difficulties of
habits for effective use of digital services to financial physical access to banks and other financial institutions and
transaction. This habit develops through an interaction of is also cost effective. It also reduces human error. Due to
an individual’s own literacy level and his ability to use the advantage of ‘Anywhere Banking’, digitization enables
digital devices or technology. a strong reporting system. The cost of mobile banking in
India is Rs 1 or less, Rs. 15 to 16 on ATMs, Rs. 2 or less in
Financial knowledge stimulates a wide range of internet banking, whereas the cost of bank transaction
financial behavior such as opening of bank account, having through branch banking is estimated to be between Rs. 70-
insurance policy, business literacy, retirement planning, 75 (Forbes India, 2017). The basic objective of spreading
borrowing habits and investment planning. On the other the digital services in the developing economies is to

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 Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
contribute to poverty reduction and financial inclusion launched the Vittiya Saksharta Abhiyan (VISAKA) for the
(UN, 2016). A majority of the financially excluded training of more than one lakh students of higher
population of these countries own a mobile phone and the educational institutions (Prasad and Meghwal, 2017).
arrangement of financial and related services through During training, they would be trained about the opening of
mobile phones can improve access to finance to them bank account, linking mobile number and Aadhaar card
(World Bank, 2016). Hannig and Jansen (2010) pointed out number to bank account, mobile wallet, Unified Payments
that financial institutions spreading to the vulnerable group Surface (UPI) based transaction etc.
tend to survive through macroeconomic crisis and supports
sustain local economic activity.  Initiative taken by India Government:
With the opening of the Indian economy in 1991-92,
 Objective: the adoption of computerization was accelerated. To remain
The objective of the present study is to examine the competitive in the globalised era, several Indian
present status of the digital financial inclusion in India. It commercial banks started to offer digital customer services.
also analyses the role of digital financial literacy in Banks also get benefitted from the adoption of new
boosting inclusive development of India. technologies. Operational costs of the banks have reduced
to a great extent with the introduction of e-banking
III. METHODOLOGY facilities. India is now approaching towards the second
phase of financial sector reforms. With increased
For the present study descriptive analytical method is integration of the Indian economy with the world economy,
adopted. Various reports published by RBI and other the risk associated with world economy would also have
financial and non financial institutions have been used as greater impact on Indian economy. The government is
relevant inputs. Besides, research articles from different contracting its net of social security schemes even from the
reputed journals, websites and magazines have been used. organized sector. In the absence of such schemes, the
instability in the financial position of the general citizens
IV. DIGITAL FINANCIAL INCLUSION IN INDIA would increase. So for financial well being of Indian
citizens, the improvement of financial literacy is very
 Policy and Regulatory Framework for Digital Financial important. Although citizens are capable of using
Inclusion in India technology, they are incompetent to use it effectively,
Despite remarkable economic growth as compared to particularly when it comes to the financial operations. In
other developing countries of the world in recent years, a order to make the Indian economy a cashless digital
sizeable portion of the Indian population still remains economy and to eradicate black money, Indian Government
unbanked. According to World Bank (2017) report, India is adopted demonetization policy in 2016. Demonetization
the second largest country with more than half of its promoted increased use of web and app based e-wallet
population financially excluded. One of the basic objectives platforms. Though digital access to bank account has
of the present NDA government (started from May 2014) is increased after demonetization, people still rely on the use
to use digitally-driven financial inclusion as a means of of money as their preferred mode of financial transaction.
promoting economic and social development of the nation. This is due to the lower level of digital financial literacy of
The initiation of PMJDY is the first step of this mission the common people.
with the aim of providing all Indians with a bank account.
It provides basic financial services like remittance facility, India’s journey in the digital financial service path can
pension and insurance benefit to the disadvantaged section be characterized as a two-phase growth process. The first
of the society by incorporating technology. It has linked phase include the period up to august, 2016, the period of
with other two initiatives of the government- Digital India demonetization and the second phase covers the period
and Aadhaar. While the former aims at rapid expansion of after demonetization. In the first phase digital financial
the use of mobile phones and internets, the latter provides a transaction volume grew steadily by 2 per cent per month
unique digital ID for every citizen. Aadhaar card makes it (starting from early 2014) (USAID, 2019). At the initial
simple to identify the actual beneficiaries and to transfer the stage of the second phase, transaction through pre-paid
money to their account. The triangle formed by PMJDY, instruments (PPIs) and debit cards started to grow rapidly
Aadhaar and Mobile for enhancing digital financial literacy with the introduction of different digital wallets and bank
was called J-A-M trinity. The government hopes that with debit cards. Soon this place is captured by Unified Payment
J-A-M trinity it would be able to reduce leakages through Interface (UPI) and NPCI’s (National Payments Council of
intermediaries, corruption and inefficiencies that eat a large India) digital payments platform.
part of government subsidies.
In 2014 Indian Government introduced Pradhan
Besides, Indian Government and Reserve Bank of Mantri Jan-Dhan Yojona (PMJDY) for the financial
India (RBI) have introduced several schemes for enhancing inclusion of the unprivileged section of the society. It is a
digital financial literacy of the people. For example, the bank-led financial inclusion that aimed at to have a bank
Ministry of Electronics and IT initiated the Digital account to all adult Indian citizens. Until March, 4, 2020
Saksharta Abhiyan (DISHA) to provide digital financial there are 38.22 crore bank accounts that are largely with
literacy training and access to such instruments by one large public sector banks with a total deposit of Rs.
crore rural citizens. Again, Ministry of Human resource has 117015.5 crore (PMJDY website). Though some

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Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
controversy exists regarding the actual figure in terms of 29.20 crore RuPay debit cards have been issued to the
new account opening and account dormancy, nevertheless beneficiaries.
it has been able to lift the accessibility barrier for the
majority of the population who were previously financially  Digital Financial transaction in India: Current State,
excluded. PMJDY has now linked with Direct Benefit Future Goals and Challenges
Transfers (DBT) and Government-to-person (G2P) Over the past few years, the issuance of debit and
payments to provide direct benefit of government schemes credit cards by the scheduled commercial banks in India
to actual beneficiaries. So the new challenge to the has grown rapidly. Debit cards issued by commercial banks
government is to move from the ‘access’ stage to ‘active in India has grown at a CAGR (Compounded annual
usage’ stage of financial inclusion. In order to promote growth rate) of 14 % from 55.4 in 2014 crore to 92.4 crore
digital transaction in PMJDY accounts, customers were in 2019. In the same period credit cards has grown at a
issued RuPay debit cards for cashless transactions. So far CAGR of 22% from 2.1 crore in 2014 to 4.7 crore in 2019.

Debit Cards Credit Cards

Year Number Growth CAGR Number Growth CAGR
2014-15 554 67% 14% 21 123% 22%
2018-19 924 47
Table 1:- Issuance of Debit and Credit Cards by scheduled Commercial Banks (in Millions)
Source: RBI

India’s mission to a cashless economy is gaining growth rate of 25.7 per cent in 2018-19 as compared to
momentum with a remarkable growth in digital transaction 2017-18. Total volume of digital transaction has increased
over the past few years. Undoubtedly, the adoption of UPI from 8.56 million Rs. to 24.13 million. The report also
and other digital innovations are making banking and points out that UPI transaction volume reached a peak of
payments very factual for the customers. According to RBI 799.5 million in March, 2019 which is 405 times the
reports, total digital transaction in volume terms recorded a volume in March 2018 (Fig. 1).

Fig 1:- Year wise volume (in million Rs.) of digital payments in India
Source: RBI

An important determinant for the measurement of digital transactions in the country is the digital transaction per capita
which is measured by the formula:
Yearly per capita transaction =12 × (total volume of digital transaction in one month)/population.

Over the past six years per capita digital transaction in India has shown significant growth – from 2.4 in Mar.2014 to 22.42
in March 2019. According to the estimate of RBI high level committee on deepening of digital payments, the figure can reach 220
by March 2021 i.e. a 10 fold increase in 3 years (RBI, 2019). (Fig. 2)

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Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165

Fig 2:- Digital payments per capita. Source: RBI data

India’s digital payment’s transaction value is expected to grow at 135.2 billion US$ in 2023 as against 64.8 billion US$ in
2019 i.e. it is expected to grow at a CAGR of 20.2 % over the period as against 8.6% in USA and 18.5 % in China (Fig. 3). In
terms of market share of worldwide transaction value of digital payments India’s share is expected to grow from 1.56 % to 2.02 %
during the same period (Fig. 4).

Fig 3:- Digital payments’ transaction value of different countries from 2019–2023
Source: Statista, 2019

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Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165

Fig 4:- India’s share in worldwide digital payments; Source: Statista, 2019
Note: Above chart only includes digital payments via online processed payment transactions, POS payments via smart phones,
and digital consumer commerce

One of the biggest challenges in online banking in Klapper, Singer, Ansar, and Hess 2018). Rapid expansion
India is the preference to traditional banking method by of mobile networks in the developing countries has opened
older generation and rural people. The fear of online fraud new avenues to fulfill the financial service needs of the
is a great barrier to the usage of e-banking. Lack of poor, particularly to the unbanked masses. Mobile
adequate knowledge among common people regarding the communications have the potential to become the low cost
use of e-banking facilities is a major constraint. Bank channel for delivering financial information including
employees should also be trained on changing trends in IT micro-payments, regular savings and micro-credit
to deal with the innovative and changing technology. There (Claessens, Glaessner and Klingebiel 2002). Digital
is also the threat of external risks like hacking, sniffing and financial services have expanded the information base of
spoofing. Besides, introduction of Artificial Intelligence the customers and lowered the information costs (World
(AI) is also a great challenge to the Indian banking system. Bank, 2016). Digital financial inclusion brings great
opportunities to consumers, businesses and to the
 Interrelationship between digital financial inclusion government.
and inclusive development:
Financial inclusion affects the level of economic Consumers: It provides convenient, affordable and
development both from demand and supply side. The secure banking services to the unprivileged section of the
demand side factors are i) illiteracy; ii) poverty; iii) society in the developing countries, as half of the total
uncertainty of job that reduces the ability to save and population of these countries own a mobile phone (World
allocation of fund for credit and insurance while the supply Bank, 2014). Increased financial services bring job
side factors include i) cost associated with maintaining the opportunity and generate consumer surplus.
bank account; ii) slow growth of bank branches and ATMs
and iii) lengthy and tedious process of banking operations Businesses: Digital financial transaction helps the
(D’Souza, 2018). Financial inclusion enables low-earning financial institutions to reduce the operational costs by
individuals to become financially independent, achieving minimising manual paper works and documentations, to
economic stability and to alleviate poverty. Unexpected maintain fewer bank branches and reduced queuing lines in
extremity and long term financial goals should not thrust the branches (IFC, 2017). As the depositors can switch
them into debt. The use of digital technologies in the form banks within moments in response to inferior services, it
of mobile phones, internet and other tools have spread forces the banks to provide quality services which
rapidly throughout the world for colleting, analyzing and indirectly enhance their efficiency. As the marginal cost of
sharing information digitally. In a developing country like offering financial services is very small, increasing returns
India more people have access to mobile phone than have to scale operates which stimulates new business models.
access to clean water or medical facilities. As more than 50
per cent unbanked and 66 per cent dormant account holders Government: Increased use of digital financial
of India have a mobile phone, digital financial inclusion services helps the government to reduce the volume of
can overcome the constraints of limited bank branches and physical cash in circulation and acts as an effective tool for
the Business Correspondent (BC) model (Demirguc-Kunt, curbing high inflation levels (GPFI, 2016). It increases

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Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
government capability by providing public services more [7]. Hannig, A., & Jansen, S. (2010). Financial inclusion
easily. Digital G2P (Government to person) payments can and financial stability: Current policy issues, ADBI
improve the efficiency of payments by lowering the cost of working paper 259, Tokyo, Asian Development Bank.
distribution and receiving them and by increasing the speed [8]. IFC (2017): Digital Financial Services: Challenges
of payment. It also increases the transparency of payments and Opportunities for Emerging Market Banks, EM
and reduces the leakage between the sender and receiver. Compass Report, No 42, August. International
Moreover, it increases the security of payments and reduces Finance Corporation, World Bank.
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security of payments and greater control over the fund financial literacy, Centre for Studies in Economics
received, digital payments can play an important role in and Finance, Working Paper No. 272.
women’s economic empowerment (Klapper and singer, [10]. Klapper, L. and Singer, D. (2017): The Opportunities
2017). and Challenges of Digitizing Government-to-Person
Payments, The World Bank Research Observer, 32
V. CONCLUSION AND RECOMMENDATIONS (2), pp. 211-226.
[11]. Matin, I., Hulme, D. & Rutherford, S. (2002) Finance
Digital transaction in financial operations is going to for the poor: from microcredit to microfinancial
be the most preferred form of transaction in the coming services, Journal of International Development, 14,
years. But the benefit of digital financial inclusion has not pp. 273-294.
been shared equally by all. Within country much [12]. Modigliani, F. and R. Brumberg (1954): Utility
improvement should be made to bridge the gap of accessing analysis and the consumption function: An
and functioning of technological innovations for digital interpretation of cross-section data. Franco
transactions. Mere extension of digital services and bank Modigliani, 1.
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