Financial Inclusion Index - Meaning, Parameters & UPSC Notes on RBI FI Index

The Financial Inclusion Index (FII) is a composite index released annually by the Reserve Bank of India (RBI) to measure the level of financial inclusion across the country. Launched in August 2021, the index captures data on how accessible, frequently used, and high-quality financial services are in India. It is scored between 0 (complete exclusion) and 100 (full inclusion), based on three broad parameters: Access, Usage, and Quality. The RBI Financial Inclusion Index helps policymakers identify gaps and design targeted strategies to promote inclusive and sustainable financial growth.

The Financial Inclusion Index (FII), released by the RBI is an important topic for UPSC Indian Economy which is a major part of the UPSC Civil Services preparation.

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What is Financial Inclusion Index?

The Financial Inclusion Index (FII) is a composite tool that the RBI has designed to capture the index of financial inclusion in the nation. It is provided in terms of one score which is rated between 0 and 100, by which:

• 0, then, means total financial exclusion.
• A full financial inclusion is 100.

The index is determined with the help of a comprehensive framework that deploys the 3 broad dimensions:

• Access the access that the financial services have.
• Usage- usage of financial services on a regular basis.
• Quality- the usefulness, dependability, and customer satisfaction of such services.

The dimension of several indicators and sub-indicators will be weighted to obtain the final index score.

Who releases the Financial Inclusion Index in India?

The Financial Inclusion Index (FII) in India is released by the Reserve Bank of India (RBI). It was first introduced in August 2021 and is published annually to measure the extent of financial inclusion across the country using three broad parameters: Access, Usage, and Quality of financial services.

Objectives of the Financial Inclusion Index

The FII was introduced with an aim as follows:

• To Measure Progress: Offer a quantifiable measure of gauging progress of the financial inclusion efforts.
• To Inform Policy Making: Assist policymakers in coming up with the weak areas and to focus where they are required most.
• In Encouraging Transparency: Provide a transparent evaluation of the extent to which India has an inclusive financial ecosystem.
• To Promote Competition: Encourage the banks, non-banking financial companies, and fintech businesses to enhance outreach and quality services.
• To Facilitate Regional Study: Bring out differences in different states and districts.

Read the article on the RBI's Role in Financial Inclusion!

The most recent score (2023) was at 60.1, indicating the country is progressing steadily in the parameters of digital payments as well as account ownership. Yet, financial literacy and quality indicators are still areas to work on.

Read the article on the National Strategy for Financial Inclusion!

The Financial Inclusion Index (FII) developed by the Reserve Bank of India is based on three key parameters: Access, Usage, and Quality. These parameters help measure how inclusive and effective India's financial ecosystem is.

Access

The parameter will measure the extent of availability of financial services using geographical and demographic coverages.

Indicators Include:

• Number of bank branch per 1 lakh adult.
• ATMs/1 lakh adults
• Banking Correspondents (BCs) availability
• Saturation of microfinance and cooperative institutions
• Availability of insurance outreach and density of agent network

Significance: Availability means that people will have the choice of who to interact with when it comes to financial services no matter where you are.

Usage

Usage examines whether people are actively engaging with the financial tools available to them.

Indicators Include:

• Number of deposit accounts per capita
• Active credit users per 1,000 people
• Average digital transactions per user
• Use of government schemes like PMJDY and APY
• Penetration of insurance and mutual fund products

Significance: Ownership of a bank account is not enough—people must regularly use it for savings, credit, insurance, etc.

Quality

Quality is a unique and often overlooked component. It emphasizes the trustworthiness, literacy, and responsiveness of financial systems.

Indicators Include:

• Grievance redressal mechanisms
• Financial education programs
• Fraud prevention measures
• Security standards in digital transactions
• Inclusiveness of product design

Significance: A high-quality financial ecosystem ensures customer protection, reliability, and long-term sustainability.

Read the article on Financial Inclusion in India! 

Importance of the Financial Inclusion Index

The Financial Inclusion Index holds the following significance:

• FII promotes inclusive growth, helping integrate economically weaker sections into the formal economy.
• The index can facilitate data-based governance decisions made by the government and regulatory settings, improving the efficiency of governance and delivery.
• The FII scores establish the culture of responsibility within the institutions making them brush up their performance within underserved areas.
• FII scores create a culture of accountability among institutions, nudging them to perform better in underserved regions.
• India can showcase its financial inclusion success story globally by referencing improvements in the FII.

Read the article on the RBI's Role in Financial Inclusion!

Some of the major challenges to financial inclusion in India include:

• Many account holders are unaware of how to use banking and insurance services, leading to dormant accounts.
• Cities are spoilt for banking selection, but they are yet to get the amenities of the bare necessities in rural schools such as ATM and broadband connections.
• Women have legal, social, and economic obstacles that block them from accessing and managing financial assets.
• With rising digital penetration, risks of fraud, phishing, and misuse have increased.
• Not having a bank account doesn't mean it is a financial exclusion, if it's not supported by real usage and quality, simply having a bank account doesn't mean it's a complete financial inclusion.

Government Schemes Driving Financial Inclusion

The Government of India has launched several schemes to ensure that every citizen, especially those in rural and low-income areas, can access basic financial services. These services include savings accounts, credit, insurance, and pensions. The aim is to reduce poverty, empower people financially, and promote inclusive economic growth.

Some key schemes promoting financial inclusion are:

Pradhan Mantri Jan Dhan Yojana (PMJDY)

Launched in 2014, this scheme helps people open zero-balance bank accounts. It provides access to banking, insurance, and pension facilities. Over 50 crore accounts have been opened under this scheme.

Direct Benefit Transfer (DBT)

DBT ensures that subsidies and welfare benefits like LPG subsidy, pensions, and scholarships reach beneficiaries directly into their bank accounts, reducing leakages and delays.

Pradhan Mantri Mudra Yojana (PMMY)

Under this scheme, small entrepreneurs can get collateral-free loans through banks and micro-finance institutions. It supports small businesses and promotes self-employment.

Atal Pension Yojana (APY)

Aimed at workers in the unorganized sector, this scheme provides a fixed pension after the age of 60, depending on the contribution made during working years.

Stand-Up India Scheme

This scheme provides loans to women and SC/ST entrepreneurs to start businesses, promoting economic inclusion and job creation.

Way Forward

• Focus on financial literacy through local language campaigns, school education, and community awareness.
• Improve banking and internet infrastructure in rural and remote areas to increase access.
• Use Financial Inclusion Index data to plan targeted interventions at the state and district levels.
• Encourage greater participation of women, SHGs, and small entrepreneurs in the formal financial system.
• Promote innovation in fintech to create user-friendly financial products for low-income and digitally new users.
• Strengthen grievance redressal systems and digital security to build trust in financial services.
• Ensure regular monitoring and evaluation of government schemes to track real-time progress in inclusion.

UPSC Previous Year Question on Financial Inclusion Index

"Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this statement? Also, explain the other financial initiatives taken by the present government for the upliftment of the poor." (200 words) (2015)

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