Financial Inclusion in Indian Banking and the RBI Framework

A banking system can be sound and still be useless to most of the people it serves. For much of the twentieth century Indian banking was precisely that: a network of urban branches lending to organised industry and trade, with agriculture, small enterprise and the rural household left to the moneylender. Nationalisation was the first answer and it was an answer by compulsion. The modern approach is different. It works by making an account cheap enough to open, a channel close enough to reach, and a payment small enough to be worth making, and then it measures whether any of it is working.

1. What financial inclusion means

The working definition is the delivery of financial services at an affordable cost to the vast sections of disadvantaged and low income groups who are outside the formal system. It has three dimensions, and the distinction between them is the single most useful idea in this subject.

1. Access: whether a person can obtain an account, a channel and a product at all. This is measured by branches, correspondents, machines and accounts opened.
2. Usage: whether the person actually uses what has been opened. An account that receives one credit and is then dormant has produced access without inclusion.
3. Quality: whether what is used is suitable, fairly priced, understood and protected by a remedy. A costly or mis-sold product delivered to a previously excluded person is not inclusion either.

Figure 1: Four things a person needs, and what supplies each

2. The instruments

The Lead Bank Scheme

Introduced in 1969, immediately after nationalisation, on the recommendation of a study group. One bank is designated the lead bank for each district and is responsible for coordinating the credit effort of all institutions there, preparing a district credit plan, and convening the consultative machinery that brings banks, government departments and other agencies together. The service area approach that followed allotted villages among branches. The scheme has been reviewed several times and remains the organising structure for district level credit planning.

The basic savings bank deposit account

The no frills account was introduced in 2005 and was recast in 2012 as the basic savings bank deposit account, available to every individual without any restriction of age or income.

• No minimum balance is required, and there is no charge for non-maintenance.
• The account carries deposit and withdrawal facilities at branches and machines, receipt and credit of money through electronic channels, and a card at no charge.
• At least four withdrawals a month, including through machines and other channels, are free.
• No charge is levied for activation of an inoperative account or for its closure.
• Under the original instructions a holder of such an account could not have any other savings account in the same bank, and an existing one had to be closed within thirty days of opening this one.

The facilities were widened by amendment directions for commercial banks issued on 4 December 2025 and applicable from 1 April 2026. There is no limit on the number or value of deposits; the free facilities include a card with no annual fee, a cheque book of at least twenty five leaves a year, and internet and mobile banking, each provided only if the customer asks for it; and digital payments other than machine withdrawals, such as transfers through the unified payments interface, do not count towards the four free withdrawals. A person may hold only one such account across all banks, on his declaration, and a bank must convert an existing savings account into one within seven days of a request.

The business correspondent

Permitted from January 2006, this is the model that solved the distribution problem. A bank appoints an agent, who may be an individual, a society, a non-governmental organisation, a cooperative, a post office, a retired employee, a shopkeeper or a company, to carry out specified banking functions at the customer's location.

• A correspondent may open accounts after identification, receive and pay small value cash, collect and process applications, recover small loans, and sell insurance, pension and mutual fund products.
• The bank remains responsible to the customer for the correspondent's acts, which is the legal core of the arrangement, and the correspondent is required to be clearly identified as acting for the bank.
• The distance restriction that once required a correspondent to operate within a fixed radius of a base branch was removed by a circular of 24 June 2014, leaving banks to fix distances in their board approved policies with an eye to supervision of the correspondent and customer service.
• Transactions are ordinarily authenticated through the Aadhaar enabled payment system, which allows a customer with no card and no telephone to transact on a fingerprint.

The Jan Dhan scheme

The Pradhan Mantri Jan Dhan Yojana, launched on 28 August 2014, was a national mission for financial inclusion built on the basic savings bank deposit account. Its features are the account itself with no minimum balance, a card of the domestic network carrying accident insurance, an overdraft facility of a specified amount available after satisfactory operation, and eligibility for direct transfer of government benefits. Its practical importance is that it made the account the default instrument of welfare delivery, which solved the usage problem that earlier efforts had not.

Figure 2: The sequence a newly included customer passes through

3. Measuring it

The Reserve Bank launched the Financial Inclusion Index on 17 August 2021. It is a composite measure on a scale of nought to one hundred, where nought is complete exclusion and one hundred is full inclusion, built from ninety seven indicators across the three dimensions, weighted access thirty five per cent, usage forty five per cent and quality twenty per cent. It is published annually in July, for the year ended the previous March, and requires no base year because it is constructed on an absolute scale. The value for March 2026, released on 16 July 2026, was 70.0, against 67.0 in March 2025, the rise being mainly on account of usage.

The strategies

• The National Strategy for Financial Inclusion, 2019 to 2024 set out the first coordinated plan, with objectives on universal access, a bouquet of basic financial services, access to livelihood and skill development, financial literacy and education, customer protection and grievance redressal, and effective coordination.
• The National Strategy for Financial Inclusion, 2025 to 2030, released by the Reserve Bank on 1 December 2025, carries five objectives, styled the Panch Jyoti, supported by forty seven action points: fair, suitable and affordable financial services for households and micro enterprises; a gender sensitive approach to women led inclusion and the resilience of vulnerable groups; linking inclusion with livelihood, skills and the supporting ecosystem; financial education for sound financial discipline; and stronger customer protection and grievance redressal.
• The National Strategy for Financial Education, 2020 to 2025 supplies the literacy side, through financial literacy centres, centres for financial literacy at the block level, and content for schools and for specific target groups.

4. Protection: the Charter of Customer Rights

The Reserve Bank released a Charter of Customer Rights in December 2014, and required every bank to adopt its own policy giving effect to it. The Charter has five rights, and they are worth knowing in order because they structure almost every customer protection instrument that followed, including the Integrated Ombudsman Scheme.

1. The right to fair treatment. Neither the bank nor its agent shall discriminate against a customer on grounds of gender, age, religion, caste or physical ability.
2. The right to transparency, fair and honest dealing. Contracts must be in simple language, all charges must be disclosed, and the customer must not be subject to terms he was not told of.
3. The right to suitability. A product must be offered on the basis of an assessment of the customer's needs, not on the basis of what the bank wishes to sell.
4. The right to privacy. Personal information is confidential and may not be disclosed save with consent or where the law requires it.
5. The right to grievance redress and compensation. The bank is responsible for the products it sells and for the acts of its agents, and must have a mechanism the customer can reach.

5. Credit for the excluded

• Priority sector lending supplies the compulsion, with a forty per cent target for commercial banks, seventy five per cent for regional rural banks, and sixty per cent for urban cooperative banks and, from the financial year 2025-26, for small finance banks, whose target was reduced from seventy five per cent, with sub-targets for small and marginal farmers, micro enterprises and weaker sections, and district weights that reward lending where credit is scarcest.
• The self help group and bank linkage programme lends to a group rather than to an individual, using the group's internal discipline in place of collateral. It is refinanced through the National Bank for Agriculture and Rural Development.
• Microfinance was recast by the Reserve Bank's framework of 14 March 2022, effective from 1 April 2022, which is regulator neutral in the sense that it applies the same rules to banks, small finance banks, non-banking financial companies and microfinance institutions alike. A microfinance loan is a collateral free loan to a household with an annual household income of up to three lakh rupees; the monthly repayment obligations of the household on all its loans may not exceed fifty per cent of its monthly household income; there is no prepayment penalty; and each lender must have a board approved policy on pricing, with a ceiling on the interest rate and disclosure through a factsheet.

6. What remains difficult

1. Dormancy. Opening an account is easy and keeping it in use is not. The index's heavier weight on usage reflects this, and the direct transfer of benefits has done more for usage than any instruction to banks.
2. Credit, not payments. India has solved access to payments far more completely than access to credit. A household with a telephone and an account may still have no formal borrowing record and therefore no formal lender.
3. The cost of the last mile. A correspondent earns a commission on very small transactions, and the economics are thin. Where the commission does not cover the cost, the network thins out precisely where it is most needed.
4. Quality. Inclusion achieved by selling an unsuitable insurance policy or an over-priced loan to a previously excluded customer is a loss rather than a gain, which is why the Charter's right to suitability and the Ombudsman's reach over mis-selling matter as much as the number of accounts.

7. Quick Revision

1. Access, usage and quality are three different things and the index weights usage highest.
2. The basic savings bank deposit account has no minimum balance and no charge for non-maintenance.
3. From 1 April 2026 a person may hold only one such account across all banks, and digital payments do not count towards the free withdrawals.
4. The bank remains responsible to the customer for the acts of its business correspondent.
5. The Jan Dhan scheme made the account the vehicle for direct benefit transfer, which solved the usage problem.
6. The Charter of Customer Rights has five rights: fair treatment, transparency, suitability, privacy, and grievance redress with compensation.
7. The microfinance framework is activity based and applies the same rules to every kind of lender.

8. Frequently Asked Questions

Why does the index weight usage more heavily than access?

Because access had been over-measured and usage under-measured. For a long period policy was assessed by the number of accounts opened and branches established, and both numbers rose impressively while a very large share of the accounts stayed dormant. An account that is never used supplies no credit history, no savings and no cushion, and it costs the bank money to maintain. Weighting usage at forty five per cent against access at thirty five forces the measurement to follow what actually happens to the customer, and the inclusion of quality at twenty per cent carries the point further by asking whether what is used is suitable and fairly priced.

Is a business correspondent an agent of the bank or an independent contractor?

An agent, and the characterisation matters. The arrangement is a form of outsourcing, and the Reserve Bank's position throughout is that a bank may outsource the activity but not the responsibility. The bank is answerable to the customer for the correspondent's acts and omissions, must satisfy itself of his fitness, must supervise him, and must ensure that he is identified to the customer as acting for the bank. A customer who is shortchanged by a correspondent complains to the bank, and a bank that says the correspondent is not its employee has not answered the complaint.

Why cap a household's repayment obligations at half its income?

Because the microfinance crisis that preceded the framework was not caused by any single lender making a bad loan. It was caused by several lenders each making a defensible loan to the same household without knowing of the others, so that the household's total obligation became impossible while every individual obligation looked modest. A cap expressed as a proportion of household income across all lenders addresses the aggregate rather than the individual loan, and it is enforceable only because every lender must check the household's existing borrowings with the credit information companies first.

Has financial inclusion in India been achieved?

In payments, very nearly; in credit, not yet. The Financial Inclusion Index has risen from 43.4 in March 2017 to 70.0 in March 2026, almost all accounts are now opened without a minimum balance, benefits are transferred directly, and a person with a telephone can send and receive money at negligible cost. What has not followed is formal credit. A household can receive and spend money formally and still have no borrowing record, and a lender with no record and no collateral has nothing to lend against, which pushes the household back to informal credit at informal rates. Closing that gap, rather than opening further accounts, is what the strategy for 2025 to 2030 is directed at.

Does the Charter of Customer Rights give a customer an enforceable right?

Not directly as a charter, but substantially in effect. The Charter is an instrument of the Reserve Bank which every bank was required to translate into its own board approved policy, and a failure to follow that policy is a deficiency in service. It is therefore enforceable through the Integrated Ombudsman Scheme and before a consumer commission, since the standard is one the bank undertook to maintain and which the regulator required. The right to suitability has proved the most useful of the five, because it reaches mis-selling, which no earlier instrument addressed squarely.

9. Related Topics and Provisions

• Priority sector lending and directed credit
• Opening of accounts and Know Your Customer requirements
• Regional Rural Banks and the sponsor bank relationship
• Small finance banks and payments banks
• The Reserve Bank Integrated Ombudsman Scheme, 2026
• Retail payment systems and the National Payments Corporation of India