Making Digital Financial Inclusion a Reality

Digital financial inclusion is defined as digital access to and the use of formal financial services by the unserved and underserved population at an affordable cost (Lauer and Lyman 2015). Notwithstanding numerous policy initiatives undertaken by the Government of India (GoI) to reach the last mile, financial inclusion continues to remain elusive for the common man. While policy initiatives coupled with reforms such as demonetisation (2016) and goods and services tax (GST; 2018) helped to increase the use of digital solutions, the COVID-19 pandemic has accelerated the adoption of digital financial solutions cutting across social segments. Digital technologies have boosted growth, expanded opportunities, and improved service delivery, yet their aggregate effect has fallen short and is unevenly distributed (World Bank 2016). To address this, the Group of Twenty (G-20) nations and the World Bank advocated eight high-level principles to achieve digital financial inclusion (GPFI 2016).

The GoI has been making concerted efforts to expand its digital infrastructure and enable access to financial services through the Unique Identity-Aadhaar and the Digital India programme (to deliver public services through digital channels and to connect rural areas with high-speed internet). Another far-reaching move towards digitisation is the shift towards government-to-person (G2P) payments or direct benefit transfers (DBTs) (GPFI 2017). In this article, we have construc­ted a framework based on the eight high-level principles of G-20 ­nations, as illustrated in Figure 1 (p 15), that could hasten digital financial inclusion in India.

Promote a digital approach to financial inclusion (HLP 1): Access to data networks through electronic devices such as computers, laptops, smartphones, etc, has increased, thus giving the much-needed fillip for the promotion of digital financial services in (rural) India. The number of internet users in India reached 624 million, with a penetration rate of 45% in January 2021 (Kemp 2021). Table 1 illustrates select indicators of payment systems in India during the last three years.

Table 1 shows that the total digital payments registered a robust growth of 26.2% in terms of volume during 2020–21 as against 44.2% in 2019–20; however, in value terms, total digital payments decreased during the last two years mainly due to negative growth observed in real-time gross settlement (RTGS) transactions in consonance with the subdued economic activity. Though debit or credit card payments enhanced in value terms, they witnessed a decline, in volume terms, from `61,769 lakh to `57,841 lakh during this period. In value terms, while Immediate Payment Service (IMPS) transactions rose by 85%, BHIM Aadhaar pay transactions increased by 217%, credit transfers through Unified Payments Interface (UPI) increased by 368% during 2019–21, reflecting widespread adoption of digital channels in the small-value segment. This reveals an interesting trend of digital financial inclusion driven by hand-held devices and contactless methods of payments or settlements. The astounding growth of digital financial transactions during 2014–19 is captured in Figure 2.

Figure 2 reveals increased penetration of mobile banking transactions and a sharp increase in retail electronic clearing. This uptick is mainly driven by growth in ownership in mobile phones, structural changes in the economy through policy reforms such as demonetisation, GST, and Digital India progra­mme. Further, India Stack has been instrumental in accelerating the digital (payments) revolution in India through the implementation of the projects such as Aadhaar, Digital Locker, UPI, etc.

Balance innovation and risk (HLP 2): The Jan Dhan–Aadhaar–mobile (JAM) phone trinity provided a fertile ground for convergence of finance and techno­logy for the last-mile connectivity and dissemination of a variety of financial products (Ranade 2017). Riding on the JAM trinity, `42.5 crore savings bank accounts have been opened with total deposits of `1.44 lakh crore as of 16 June 2021 (GoI 2021). Thus, JAM brought a majority of the financially excluded into the mainstream banking domain. However, risk perception in the microenterprise segment and users of small-value transactions is low (Chopra and Ranjani 2020), making the segment highly vulnerable. To address this, the Reserve Bank of India (RBI) announced techno­logy and platform agnostic guidelines to enforce “common minimum standards” of security controls in the digital payment space through the RBI (Digital Payment Security Controls) Directions, 2020. To help this segment further, audiovisual contents or booklets may be created as part of the digital or financial literacy drive.

Provide an enabling legal environment to protect consumers (HLP 3 and 5): During the financial year (FY) 2016–17, the RBI instructed the banks to limit the liability of the cust­omers in fraudulent electronic banking transactions if the same are reported within the prescribed time; additionally, the RBI also introduced an online dispute resolution mechanism, a complaint management system, and a grievance redressal framework related to failed payment transactions during FY 2020–21. However, data from RBI shows that much more needs to be done in this direction. For instance, reported cyber frauds in cards or internet banking transactions got more than doubled from 629 (involving `23 crore) to 1,372 (involving `42 crore) during 2012–17. Banking outlets in India received 3.09 lakh complaints during FY 2019–20 with a massive growth rate of 57.5%; the majority of these fall under ATM or debit cards (22%), mobile or electronic banking (13.38%), and credit cards (9.3%) categories. As such, retail and poor customers, who are at the receiving end, need to be legally protected in this regard.

Expand the digital financial infrastructure (HLP 4): Given the increasing customer demand during the COVID-19 period, electronic banking facilities, namely NEFT and RTGS, have been made available round the clock and at free of cost to facilitate digital financial inclusion. Further, the GoI covered 319 central schemes under 54 ministries for making DBTs (DBTM 2021a). Similarly, the total number of beneficiaries under 36 Aadhaar Enabled Payment Systems stood at 471.48 crore as of May 2021 (DBTM 2021b). Introduction of the National Electronic Toll Collection system (FASTag) enables the customers to pay toll fares from a pre-paid bank account to save on time and fuel. As of 30 April 2021, the electronic National Agriculture Market (e-NAM) covered 1.70 crore farmers from 1,852 farmer producer organisations (FPOs) in 21 states. This enables the farmers to connect to the markets, thereby achieving price discovery.

Financial and digital literacy (HLP 6): The RBI developed the National Strategy for (a) financial inclusion (NSFI 2019–2024) to provide access to formal and affordable financial services, by promoting financial literacy and consumer protection (RBI 2019); and (b) financial education (2020–25) to create awareness and disseminate knowledge on financial inclusion to all the stakeholders and ­advised the states to incorporate modules on financial or digital literacy in the school curriculum. Besides, the Securities and Exchange Board of India (SEBI), Association of Mutual Funds in India (AMFI), National Centre for Financial Education (NCFE), etc, have been making concerted efforts to impart financial and digital literacy for all the citizens through electronic as well as print media.

Focus on lives and livelihoods (HLP 7): As per the ILOSTAT database, the unemployment rate reached its peak level in India (7.11%) during the COVID-19 crisis (Business Today 2021). Millions of micro and small enterprises face an existential threat as they do not have social security, access to quality healthcare, and income-generating operations during the pandemic season. The GoI responded by increasing the allocation of resources by 137% and earmarked `2.24 lakh crore in its budget for FY 2021–22 towards the health and well-being of the populace. To save lives and create sustainable livelihoods, the RBI eased the norms for “know your customer (KYC)” requirements, through self-certification, to accelerate the opening of bank accounts by the unbanked population. Banks are also encouraged to open Aadhaar-enabled accounts of individuals so that their credit histories can be built up over time. These measures have undoubtedly helped in identifying beneficiaries for making DBTs.

Review the progress (HLP 8): Digital financial transactions by micro, small and medium enterprises (MSMEs) on Trade Receivables Discounting System (TReDS)1 witnessed phenomenal growth during 2017–20 (Table 2). One of the main reasons for the wider adoption of this electronic platform is the treatment of these loans under priority sector lending since 2016. MSMEs could partially solve their long-delayed receivables by participating in the TReDS platform with a success rate of above 85% in FY 2019–20. Similarly, the small and marginal farmers were able to access institutional credit by utilising Kisan credit cards (KCCs) to the extent of `6.79 lakh crore as of March 2021. Though the number of basic savings bank deposit accounts (BSBDA), meant for the unbanked population, recorded a growth rate of 21%, the deposit amount in these accounts witnessed a remarkable growth rate of over 81% during the last four years. Total banking outlets in villages witnessed more than 100% growth during FY 2020–21 mainly due to the promotion of business correspondents in hamlets with a population of less than 2,000 (RBI 2021).

Further, the number of mobile and internet banking transactions per 1,000 Indian adults increased from 103 in 2015 to 6,184 in 2019 (Figure 3). However, India had lacklustre performance vis-à-vis other countries like Indonesia, Russia, Switzerland, and Turkey during 2014–19 in this context.

During 2010–17, nearly 1.2 billion people opened an account with formal financial institutions or mobile financial service providers for the first time. Much of this progress is attributable to the delivery of digital finance by financial technologies (FinTech) throughout the world (Demirguc-Kunt et al 2017). As per the Global Findex database (2017), only 29% of females in India use digital payments, as against 42% of males, probably due to a skew in ownership patterns (Draboo 2020).

Policy Implications

A major hurdle in achieving digital financial inclusion in India is low financial literacy (both concept and process literacy) at the bottom of the pyramid. The digital divide in India is too wide amid challenges like last-mile connectivity, dormant accounts, non-availability of suitable financial products, lack of financial literacy or skills among the stakeholders to use digital services, infrastructural issues, and low-income clients who are not able to afford the technology required to access digital services (Niranjan 2017). As digital technologies have proved to be cost-effective, act as barriers to corruption, and improve efficiency in the delivery of public services, there is a compelling need to build reliable and accessible connectivity (through Bharat Net) in rural areas.

Apart from focusing on digital financial infrastructure, human resources should be leveraged by skilling and positively engaging the unbanked population to achieve the last-mile connectivity in financial inclusion. Resource allocation for the development of human capital in terms of education, healthcare, water, and sanitation would enhance the credit absorptive capacity of the weaker sections of the society and lead to digital financial inclusion in the long run. Appropriate legal measures and upgradation of regulatory surveillance to cultivate responsible digital financial practices among the suppliers or service providers would ensure protection to the consumer. While deepening digital financial inclusion, public trust should be enhanced by focusing on grievance redressal mechanism, and handholding support. This will ensure higher participation of the poor households in digital financial transactions and lead to better risk management.

On the supply side, training, and capacity building of human resources of banks or financial institutions are crucial to leverage the technologies like artificial intelligence, blockchain, internet of thi­ngs, etc. Banks need to embrace digitisation and cybersecurity norms to meet the changing customer preferences and business requirements. Banks or financial institutions may offer “credit plus services” for handholding and marketing of the products/services of the self-help groups (SHGs), FPOs, MSMEs through e-commerce portals like e-NAM/Mahila e-HAAT, etc, to achieve digital financial inclusion. Besides, policymakers may look at replication of successful business models in digital financial architecture across the country. For instance, Stree Nidhi, a community-based microfinance institution based in Andhra Pradesh and Telangana, delivers instantaneous credit (sanction of loans within 48 hours), and user-friendly operating model by use of the latest technology (tablet personal computers and short messaging service or SMS for every transaction), and biometric authentication for low-cost credit delivery (interest rate @ 12.5% per annum). Similarly, implementation of the Prime Minister Street Vendor’s Atma Nirbhar Nidhi scheme (PM SVANidhi) is a timely policy intervention to create a digital record of the street vendors and their socio-economic profile, to enable them to access various other central government schemes.


COVID-19 has led to colossal losses in lives and livelihoods, especially among the poor. Higher allocation of funds for healthcare and the creation of sustainable jobs will ensure that the poor will have sufficient money in their bank acc­ounts to transact—the first milestone in the journey of their digital financial inclusionSustainable financial inclusion requires systemic efforts towards leveraging technology, viable business models, and appropriate regulatory framework (Khan 2011). G-20 nations recognised fin­ancial inclusion as a catalyst for collective economic development and financial stability and formulated eight high-level principles. These principles, if implemented in letter and spirit, would pave the way for digital financial inclusion in India. As India progresses in its economic journey and aims to become a $5 trillion economy by 2024, digital financial inclusion would lead to the reduction of poverty and income inequality.


1 TReDS was introduced in 2014 by the RBI to enable MSMEs to discount their receivables on an electronic platform; these receivables are in the form of invoices/bills drawn on buyers such as large corporate houses, government departments, public sector undertakings, etc, TReDS enable MSMEs to obtain finance from multiple banks/financial institutions through a competitive auction process.


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