India’s Most Financially Inclusive States

Crisil has launched an index that measures financial inclusion in India, and some of the county’s most industrialized states don’t fare too well.

By Nupur Acharya

A man counted money in Mumbai, June 20.

Indranil Mukherjee/Agence France-Presse/Getty Images

Gujarat and Maharashtra are generally popular with industry thanks to their relative openness to investment. But in terms of financial inclusion, India’s top two industrialized states fall below the national average, a recent report showed.

When it comes to access to financial services for all sections of society, the top states are found in the south of India, according to Crisil Inclusix, an index that measures financial inclusion.

The index, launched last week by ratings firm Crisil, measures financial inclusion on a scale of 1 to 100, with 100 signaling that an entire population has access to banking services. Gujarat has a rating of 38.6, just ahead of Maharashtra on 37.5. The national average is 40.1.

Six of the 10 most inclusive states are in the south. Puducherry is top with a score of 79.6. Chandigarh in the north and Goa in the west are also in the top 10. The bottom five are Arunachal Pradesh, Chhattisgarh, Bihar, Nagaland, and Manipur, the lowest with a rating of 16.6. These five are all in east and northeast India.

India as a whole had a financial inclusion rating of 40.1 in 2011, the latest available reading, up from 37.6 in 2010. “It [India’s reading] is a reflection of under-penetration of formal banking facilities in most parts of the country. Just one in two Indians has a savings account, and only one in seven Indians have access to banking credit,” the report says.

The government and the Reserve Bank of India have both acknowledged that millions of people still need to be brought into the banking fold.

Real financial inclusion should ensure that a range of financial services are available to every individual. This includes a basic bank account, savings products suited to poor households, money transfer facilities, small loans, overdrafts, and insurance.

Crisil’s index uses three parameters: branch penetration, deposit penetration (the number of deposit accounts) and credit penetration (number of borrower accounts.)

“Lack of awareness, low incomes, poverty, and illiteracy are among factors that lead to low demand for financial services and, consequently, to exclusion,” the report said.

Often, people feel it is easier to borrow from informal credit sources instead of traveling long distances to banks, which may not have convenient opening times and can require reams of documentation. Informal money lenders typically charge high interest rates.

“Financial inclusion… is not just about opening of saving bank accounts; it includes creation of awareness about financial products, and offering of advice on money management and debt counseling,” the report added.