Financial inclusion cannot be measured by the number of loans disbursed. It cannot be measured merely by opening bank accounts or through digitisation alone. Nor can it be achieved in the name of "efficiency" by shrinking bank branches and replacing employees with Banking Correspondents.
One of the principal claims made in recent years is that India has achieved significant milestones in financial inclusion. The Reserve Bank of India's National Strategy for Financial Inclusion (NSFI) 2025–30 projects a celebratory narrative of progress, citing improvements in the Financial Inclusion Index and increased usage of financial services. But have banks truly served the people? Has their conduct in recent years actually advanced genuine financial inclusion? These claims deserve closer scrutiny against a backdrop of mounting public discontent, a deepening cost-of-living crisis, widespread youth unemployment, and policy prescriptions that remain indifferent to the growing precarity of ordinary Indians. Have banks supported people through these uncertain times, or have they aggravated their hardships?
Who will Protect the Depositor's Interests?
The latest Basic Statistical Return data released by the Reserve Bank of India points to a significant shift in the composition of bank deposits. Between March 2022 and March 2026, the share of low-cost savings deposits declined from 34.6 per cent to 28.7 per cent, while the share of higher-interest term deposits increased from 55.2 per cent to 61.6 per cent.
This trend is worrying because savings accounts have traditionally provided banks with a stable and inexpensive source of funds while allowing depositors easy access to their money. However, following the deregulation of savings deposit interest rates, banks steadily reduced returns, with some offering as little as 2.5 per cent today. Over the past decade, consumer price inflation has averaged around 5.5 per cent annually. Consequently, the real return for most depositors has been negligible—often around one per cent or even lower. This has translated into a substantial loss for ordinary savers and has, in many ways, discouraged low- and middle-income households from relying on the formal banking system.
Without depositors' funds, banks simply cannot function. More than 60 per cent of bank deposits come from households, while individuals account for nearly 95 per cent of all depositors. Banks therefore have a primary responsibility towards depositors—not merely to safeguard their money but also to provide a reasonable return on their savings. As the custodian of the country's monetary system, the Reserve Bank of India has an equally important responsibility to ensure fair returns for depositors, whose savings ultimately finance economic growth through lending.
Faced with declining returns on savings accounts, depositors have increasingly shifted towards term deposits, which are more expensive for banks to service, or towards mutual funds, reducing the availability of low-cost deposits. This shift comes against the backdrop of the persistent gap between credit growth and deposit growth that former RBI Governor Shaktikanta Das had repeatedly flagged. With loans growing faster than deposits, banks are already facing funding pressures that could adversely affect the stability of the banking system.
Is Credit Reaching Those Who Need It?
The government's approach to financial inclusion has increasingly relied on reducing bank branches while expanding the network of Banking Correspondents (BCs), even as rural credit has weakened. Ironically, the National Strategy for Financial Inclusion itself acknowledges serious shortcomings in the BC model. It highlights concerns relating to non-dedicated outlets, limited services, inadequate supervision, poor remuneration, low participation of women, and high levels of inactivity. On the demand side, irregular incomes, the absence of nearby branches, and lack of collateral continue to exclude large sections of potential borrowers.
Yet, instead of recognising the need to expand well-staffed public sector bank branches, the proposed solution is to further deepen dependence on the BC model.
This vacuum has increasingly been filled by Non-Banking Financial Companies (NBFCs), Microfinance Institutions (MFIs), and fintech loan applications that often function as modern-day moneylenders, charging exorbitant interest rates and employing coercive recovery practices. Strikingly, nearly 85 per cent of loans below ₹50,000 are now extended by NBFCs.
The RBI's draft amendments issued in February 2026 on the conduct of loan recovery and engagement of recovery agents by banks and NBFCs reflect continuing concerns regarding aggressive recovery practices, particularly in the NBFC and digital lending ecosystem. However, given the scale of NBFC operations, their rapid proliferation, and their heavy dependence on outsourcing, effective regulation remains a formidable challenge. This is compounded by the RBI's reliance on industry-led Self-Regulatory Organisations (SROs), while direct regulatory oversight remains limited.
The Economic Survey notes that among agriculture, industry, services and personal loans, the highest year-on-year growth in non-food credit has been in personal loans, which increased by 12.8 per cent in November 2025. This corresponds with the Financial Stability Report's finding that household debt reached 41.3 per cent of GDP by the end of March 2025, significantly above its five-year average of 38.3 per cent.
More concerning is the composition of this borrowing. Non-housing retail loans, largely taken for consumption purposes, account for 55.3 per cent of total household borrowing from financial institutions as of September 2025, exceeding housing loans as well as agricultural and business borrowings.
It is deeply disturbing that large corporates today can access credit at substantially lower interest rates than ordinary citizens. Loans carrying interest rates below 8 per cent are far more readily available to private corporations than to households. Conversely, loans carrying interest rates above 11 per cent are disproportionately concentrated among household borrowers while remaining relatively uncommon for corporates. This represents a complete reversal of the ideals of social banking. Ordinary Indians' deposits are effectively subsidising cheaper loans for large corporations, even as depositors receive poor returns on their savings and households struggle to access affordable credit.
The result is a credit landscape in which people grappling with stagnant wages, rising fuel prices, escalating living costs, precarious employment, and the privatisation of essential services are increasingly pushed towards predatory lending by NBFCs, loan apps and MFIs. Many are borrowing simply to meet daily expenses, finance medical emergencies, or repay existing debts.
Microfinance has not Delivered Inclusion
This year's Economic Survey quietly acknowledged something that has long been ignored in official discourse. Significantly, the admission did not appear in the main text but was tucked away in a boxed section—almost like a confession regarding the state of microfinance in India.
Government policy and RBI initiatives have consistently portrayed NBFCs and MFIs as instruments of financial inclusion. Yet the Survey delivers a starkly different message. It warns that the sector is showing signs of severe stress, particularly through rising over-indebtedness and distress borrowing among rural households. These concerns echo warnings repeatedly raised by civil society organisations about the transformation of microfinance into a profit-driven industry, where private NBFCs frequently charge exorbitant interest rates while resorting to coercive recovery practices.
Microfinance overwhelmingly serves the most vulnerable sections of society. As of March 2025, women constituted 95 per cent of borrowers, while nearly 80 per cent lived in rural areas. NBFC-MFIs accounted for 39 per cent of outstanding microfinance loans, followed by banks (32 per cent), Small Finance Banks (16 per cent), NBFCs (12 per cent), and others (1 per cent).
Far removed from the celebratory narrative surrounding the sector, the Survey points to a sharp reversal in FY25, with outstanding loans declining by 14 per cent year-on-year, largely due to widespread credit overexposure.
This slowdown is not an isolated phenomenon but part of a recurring cycle characterised by excessive lending, multiple borrowing, and rising non-performing assets.
Microfinance was originally conceived as a means of helping low-income households manage risk, stabilise incomes, and gradually build assets. The focus was on strengthening household resilience rather than expanding credit rapidly. Over time, however, the sector became increasingly integrated with capital markets and commercial investors. As investor expectations grew, many institutions shifted their priorities towards expanding loan portfolios and maximising financial returns.
One of the most troubling consequences of this transformation has been the reliance on misleading indicators of "impact". Measures such as the number of borrowers, the size of loan portfolios, the proportion of women borrowers, or geographical outreach are frequently presented as evidence of success. While these statistics demonstrate scale, they reveal little about whether borrowers are actually better off. Worse still, they encourage repeated lending, loan top-ups, and deeper indebtedness, even when borrowers have limited repayment capacity. Rapid credit expansion without careful assessment weakens household finances and pushes vulnerable families into chronic debt. Even NABARD has recently expressed concern that the RBI's removal of interest rate caps for NBFCs has contributed to growing pockets of indebtedness.
AI: The New Frontier in the Battle for Inclusion
The current enthusiasm for Artificial Intelligence in banking, promoted in the name of "efficiency", must also be examined through the lens of financial inclusion. The RBI has already released its Framework for Responsible and Ethical Enablement of Artificial Intelligence, but trade unions have criticised both its opacity and its top-down approach, arguing that workers were excluded from meaningful consultation.
Rupam Roy of the All India Bank Officers' Confederation observes:
"In an era where AI implementation is often driven by competitive pressures and efficiency mandates, we underline that technology should serve human needs rather than the reverse. The debate over AI in banking extends far beyond technical specifications or regulatory frameworks. It encompasses questions of economic justice, democratic participation in technological decision-making, and the kind of society we wish to create through our technological choices. Our call for 'dialogue first, deployment next' may slow the pace of AI adoption, but it offers the promise of a more sustainable, equitable and ultimately successful technological transformation."
What is particularly troubling is AI's potential to deepen existing inequalities in access to banking. If poorly designed or inadequately regulated, AI systems could systematically disadvantage rural communities, linguistic minorities, and economically vulnerable populations. In a country like India, where financial access is already shaped by multiple layers of social and economic inequality, algorithm-driven decisions could further entrench exclusion.
The risks extend beyond technical concerns such as data security and privacy arising from the sharing of sensitive customer information with AI systems. They also include ethical concerns, where flawed datasets or hidden algorithmic biases may produce discriminatory outcomes. Without robust safeguards, banks could increasingly hide behind the "invisible hand" of AI to justify lending decisions that ignore principles of fairness and social responsibility, effectively shifting accountability from institutions to machines.
Financial inclusion cannot be measured by the number of loans disbursed. It cannot be measured merely by opening bank accounts or through digitisation alone. Nor can it be achieved in the name of "efficiency" by shrinking bank branches and replacing employees with Banking Correspondents.
---
This chapter is excerpted from "Promises & Reality 2026: Citizens' Review of Year Two of the NDA-III Government". Source: CFA website
Comments
Post a Comment
NOTE: Hateful, abusive comments won't be published. -- Editor