ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Financial Literacy and Financial Inclusion

Unbundling the Nexus

Using district-level data, the effect of financial literacy centres on financial inclusion in India is investigated. There is evidence of an improvement in the use of bank accounts over time. Robustness tests suggest that banks with a strong capital position and asset quality are more inclusive through their financial literacy centres, and the traditional bank agents continue playing an important role in this process despite non-traditional channels like mobile telephony. Yet, the findings show that the overall impact of financial literacy on bank account ownership is still limited. The analysis raises useful policy pointers to address those impediments that plague the process.

The author would like to thank the anonymous referee for the useful technical comments on an earlier draft. The views expressed and the approach pursued in the paper reflects the personal opinion of the author.

Finance has been widely regarded as a powerful intervention to foster economic growth (King and Levine 1993; Rajan and Zingales 1998; Demirgüç-Kunt and Klapper 2013; World Bank 2014; Demirgüç-Kunt et al 2015). And yet, as of 2017, roughly a third of the adults globally remain unbanked, down from nearly 50% in 2011 (Demirgüç-Kunt et al 2018). What this suggests is a discernible gap between the availability of finance and relatedly, its use.

The evidence at the global level is also echoed in the Indian context. To illustrate, although 690 million adults were added into the fold of account holders between 2011 and 2017, the extent of financial inclusion—defined as an adult (aged 15 years and above) having an account at a formal financial institution or through a mobile money provider—stood at 80% in 2017, up from 35% in 2011. What is less impressive is the use of finance. On average, 14% of Indian individuals saved at any financial institution in 2014, up just 2 percentage points since 2011. By 2017, although this increased to 20%, it was much lower than the global average of 27%. The picture is even starker when it comes to the use of formal credit with only 7% of individuals in India borrowing from a financial institution in 2017, lower than the global average of 11% and the lowest among the other Brazil, Russia, India and China (BRIC) countries (Ghosh 2019b).

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Updated On : 29th Mar, 2019
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