MUMBAI: Of late there has been some concerns of excessive borrowing in unsecured segment and from derivative euphoria in the capital markets, Rao said
Though as much as 80% of the adult population have bank accounts now, thanks to the Jan Dhan Yojana or no-frills accounts, meaningful use of these accounts remains a challenge, rues Reserve Bank deputy governor M Rajeshwar Rao.
According to RBI’s financial inclusion index, the extent of financial inclusion stood at 64.2 in March 2024, up from 60.1 in March 2023 and 43.4 in 2017. The index is based on three sub-indices: access, quality, and usage.
“We have made remarkable progress in expanding financial access through schemes like the Jan Dhan Yojana, ensuring that 80% of adults now have a bank account. To date, 54.84 crore bank accounts have been opened under the scheme, with a total balance of at least Rs 2.45 trillion,” Rao said while addressing an annual conference on macroeconomics, banking and finance organized by the Indian Institute of Management Kozhikode and the National Stock Exchange, here Friday.
“However, true financial inclusion goes beyond merely having a bank account - it requires meaningful engagement with financial services,” he said, adding a bank account should serve as an entry point for individuals to access a broader suite of financial products, including credit, insurance, pensions, and investment opportunities.
“Without this deeper engagement, financial inclusion remains superficial, and the true benefits of a formal financial system will not reach every individual or business,” Rao, who was last month made in-charge of the monetary policy department, stressed.
This engagement is crucial as financialization and financial inclusion are often used interchangeably, but they represent distinct aspects of economic development, he said, adding financialization refers to the increasing role of financial markets, institutions, and instruments in an economy while financial inclusion focuses on ensuring that every individual, especially those from underserved and marginalized communities, has access to basic financial services like savings accounts, credit, insurance, and digital payments.
“A bank account should serve as the entry point for individuals to access a broader suite of financial products, including credit, insurance, pensions, and investment opportunities. Without this deeper engagement, financial inclusion remains superficial, and the true benefits of a formal financial system do not reach every individual or business,” Rao underlined.
He went onto argue that “a significant gaps lies in access to credit, particularly for the informal sector employing millions. Traditional credit models, which rely heavily on collateral-based lending, fail to accommodate first-time borrowers and small businesses with limited credit histories. As a result, such entities and individuals either remain underfunded or turn to informal sources of credit, often at exorbitant interest rates.”
Another critical gap is in insurance penetration, which stands at just 3.7% in FY24, significantly lower than the global average of 7%. Similarly, pension assets account for only 21.5% of GDP (17% under EPFO and 4.5% under NPS), which pales in comparison to the 80% of GDP in OECD countries, he said.
In his speech, Rao also highlighted that the improvement in the financial inclusion index in fiscal 2024 was largely driven by the usage dimension, reflecting the deepening of financial inclusion.
“While this indicates progress in the right direction, there is still a long way to go in ensuring that vulnerable and low-income groups have access to secure and affordable finance,” he said.
Flagging the excessive borrowing in the unsecured segment and speculative trends in the capital markets, Rao said, “the temptation of short-term gains can easily overshadow long-term financial security,” and that financial entities have a duty to ensure customers fully understand the risks associated with leveraged products and speculative investing.
“While the RBI, along with other financial sector regulators, is taking progressive steps to educate customers, financial sector entities must also shoulder part of the responsibility. A lack of financial literacy leads the people to fall prey to unscrupulous players, which erodes trust in the system,” he said.
“Increased financial literacy will enhance trust in the sector and its participants, ultimately benefiting financial entities themselves. Educating customers helps protect them from fraudulent practices, while regulation plays a critical role in maintaining stability and preventing systemic failures,” Rao added.
Further he said our national goal of becoming an advanced economy by 2047 will require us to effectively integrate technology with finance to deepen markets, expand financial inclusion, and drive economic productivity.
“Innovation in finance has always been a double-edged sword - on one side, it drives efficiency and inclusion, but on the other, it can destabilise traditional structures if not managed well. This is where the distinction between creative disruption and creative destruction becomes crucial,” he said, adding while both terms may seem similar, they carry very different implications.
Creative destruction, as popularized by economist Joseph Schumpeter, refers to the complete dismantling of old systems to make room for new ones. In contrast, creative disruption is a more nuanced process - it’s about evolving existing systems, refining them, and making them better through technological innovations. We are not simply looking to replace what exists but to transform it for the better, he said.