Chapter No.

4: Financial Inclusion and Priority Sector Lending in India

Introduction and Meaning:
Financial inclusion is a broad process that includes various aspects. It mainly refers to
providing better and more affordable financial services and credit access to low-income
and economically weaker sections, which are otherwise limited in availability.

Financial inclusion means providing appropriate and convenient financial products and
services to individuals and businesses that fulfill their needs—such as transactions,
payments, savings, credit, and insurance—delivered responsibly and affordably.

Financial inclusion ensures that financial products and services are available to all
sections of society, especially economically weaker individuals and businesses. It aims to
provide them access to essential banking, credit, insurance, and financial products. It is a
process that supports economic growth by providing loans, banking services, investment
opportunities, and access to financial instruments. Financial inclusion helps in reducing
economic disparities by ensuring that financial services reach even those who are
traditionally excluded, such as rural households and small businesses.

The primary focus of financial inclusion initiatives is on individuals who do not have access
to banking services or have minimal access to financial services. Financial inclusion
ensures that such individuals are brought into the formal financial system, enabling them
to use banking facilities. More bank account holders lead to increased financial
transactions, which ultimately contribute to economic growth.

In 2021, approximately 1.4 billion people worldwide did not have bank accounts. Among
those without banking access, a significant portion includes women and the rural poor.
People who are excluded from financial institutions face various difficulties, including
social discrimination and lack of financial security. Due to a lack of access to financial
facilities and services, underserved and economically weaker communities struggle to
improve their financial conditions.

Providing adequate information and making financial services accessible to economically

weaker communities can help them enhance their financial well-being. For example,
microfinance institutions and small banks play a crucial role in supporting financially
weaker sections by offering them credit and other financial services.
People are attracted to loans with controlled interest rates but may not have proper knowledge
about compound interest. Such people, when provided with loans by certain institutions, develop
a habit of taking loans and may get trapped in a cycle of debt.

In the public sector, providing access to financial services in a more organized manner is
essential to ensure economic stability. Financial literacy and education should be encouraged so
that people can understand economic education, tax preparation, and welfare assistance. Non-
profit organizations focus on providing services to low-income communities and offer financial
guidance and state-supported assistance. Financial institutions, legal aid firms, and similar
organizations work to provide structured and regulated financial services.

Bill AB-423 is an example of how financial awareness can help people make informed financial
decisions. This bill mandates financial education in public schools to ensure students gain the
necessary financial knowledge.

Not everyone is interested in financial services, but financial inclusion ensures that all
individuals, regardless of their preference, have access to banking, loans, insurance, payment
services, investment tools, and more. Economic stability is enhanced when people have secure
financial access, allowing them to make informed choices.

Some individuals may not trust financial institutions due to religious, cultural, or ethical reasons
(such as avoiding loans with interest). However, financial education helps build awareness and
enables them to make informed economic decisions.

Financial accessibility and inclusive financial services create a strong economic structure.
Research indicates that financial inclusion leads to better economic stability and increased
participation in banking services.

Financial inclusion ensures that all individuals, especially those who lack access to traditional
banking, can participate in the financial system. In India, financial inclusion means making
essential financial services—such as banking, loans, insurance, payment services, and investment
tools—easily accessible, affordable, and secure for all citizens.

Key Aspects of Financial Inclusion in India:

1. Providing Banking Facilities:

In India, many people in rural and remote areas lack access to banking services.
Financial inclusion ensures that bank branches, ATMs, and digital banking services
are expanded to reach a larger population.

2. Digital Banking and Mobile Banking:

With the increased use of smartphones, the adoption of digital banking, mobile
 payments, and UPI (Unified Payments Interface) technology has grown. This helps
citizens easily access financial services.

3. Loan Facilities:
Through financial inclusion, banks and financial institutions offer easy and low-
interest loans to farmers and small businesses. This includes home loans,
insurance, and startup support.

4. Insurance and Pension Schemes:

Financial inclusion makes banking and various insurance products and pension
schemes more accessible, ensuring greater financial security for individuals.

5. Financial Literacy:
People should be educated about financial management, savings, investments, and
the proper use of financial services. This increases financial awareness and helps
individuals make informed decisions.

6. Government Benefits Access:

The government provides various schemes such as Jan Dhan Yojana, low-cost
insurance plans, PM Kisan Yojana, and pension schemes, which are distributed
through financial inclusion programs, ensuring benefits reach the needy.

Importance of Financial Inclusion in India:

Financial inclusion is a crucial aspect of India’s economic vision. In different sectors of
India, including poor and rural areas, financial inclusion plays a vital role in providing
banking services, loans, savings, insurance, and other financial tools. This enhances
economic growth and financial stability by increasing participation in the financial system
and improving living standards.

1. 1: Encouraging Underdeveloped Sectors:

Financial inclusion allows poor and rural populations to access banking services,
including credit, savings accounts, insurance, and other financial tools. This is
significant for the economic development of rural areas, as access to credit helps
farmers and small entrepreneurs expand their businesses.

2. Achieving Social Equality through Financial Inclusion:

The availability of banking services and financial tools provides opportunities for the poor,
backward communities, their families, and society to improve their financial stability.
Financial inclusion helps reduce economic inequality, ensuring that every section of
society gets an opportunity to participate in development.

3. Efficient Distribution of Government Schemes:

Financial inclusion enables the direct transfer of benefits from various government
schemes to the intended beneficiaries. For example, schemes like Pradhan Mantri Jan
Dhan Yojana (PMJDY) and Pradhan Mantri Kisan Yojana (PMKSY) allow the government to
transfer benefits directly to bank accounts, ensuring transparency and reducing
corruption.

4. Increasing Financial Literacy and Awareness:

Financial inclusion provides people with essential financial knowledge, including the
importance of bank accounts, savings, investments, and securing assets through
insurance. This helps increase financial awareness, allowing individuals to make informed
financial decisions and conduct secure transactions.

5. Promoting Entrepreneurship and Employment Opportunities:

Financial inclusion supports small and medium-sized enterprises (MSMEs) by providing
easy access to credit and financial services. This encourages entrepreneurship, creates job
opportunities, and strengthens local economic development.

6. Enhancing Savings and Investment Habits:

When financial services are easily accessible, people develop better saving habits. This
improves financial security as more money is deposited in banks, rather than being stored
in cash, making it available for economic growth and productive investments.

7. Insurance and Pension Schemes:

Financial inclusion ensures that poor people have access to insurance and pension
schemes, improving their quality of life. This financial support helps them during accidents,
severe illnesses, or retirement, ensuring their long-term security.

8. Building a Strong Economy:

Financial inclusion strengthens the country's economy by integrating all sections of society
into the financial system. When every individual has access to financial resources, it
increases overall economic participation, boosts national savings, and promotes
sustainable economic growth.

9. Women Empowerment:
Through financial inclusion, women gain access to financial services, enabling them to
make independent business decisions, save money, and manage household expenses
efficiently. This access significantly contributes to women's economic empowerment.

10. Stability of the Economy:

When a greater number of people use banking and financial services, the financial system
becomes more active, leading to increased investment and economic growth. This process
strengthens economic stability and accelerates overall development.

Priority Sector Lending (PSL):

Priority Sector Lending (PSL) refers to the mandatory provision of a certain percentage of
bank loans to specific sectors that are crucial for economic and social development. These
sectors include agriculture, small enterprises, education, housing, renewable energy, and
social infrastructure. Banks are required to allocate a specific proportion of their lending to
these priority sectors as directed by government policies and financial institutions.

Key Components of Priority Sector Lending:

2. 1 Agriculture:
Financial assistance is provided for various agricultural activities such as farming,
food production, and the purchase of necessary agricultural equipment. This
financial support aids in increasing agricultural productivity and improving farmers'
livelihoods.

3. 2:Small Scale Industries (SSI):

Loans are extended to small businesses to help them expand and sustain their
operations. Small-scale industries include activities such as minor manufacturing,
production workshops, handicrafts, and other local enterprises that contribute to
economic growth.

3. Family Employment (Micro Enterprises & Self-Help Groups):

4. Loans are provided for family employment projects and self-help groups (SHGs) to
make them self-reliant.
5. Women's groups, small businesses, trade, and family enterprises are eligible for
loans.

4. Education:

6. Loans are provided for students' higher education. Under this, students get financial
support for school, higher education, and professional studies.
7. Loans are available for school and college education as well as for studying abroad.

5. Health:

1. Financial assistance is provided for health needs due to financial constraints in the
primary sector.
2. Loans are given for hospitals, clinics, medicine, medical instruments, and
equipment.
3. Loans are available for setting up health service centers, medical facilities, and
purchasing other necessary healthcare-related items.

6. Environment Conservation and Sanitation:

1. Loans are provided for environmental improvement, forest conservation, pollution

control projects, and water conservation efforts.
2. Loans are sanctioned for projects approved by government institutions and
research organizations.

7. Agricultural Allied Activities:

1. Loans are given for agricultural activities such as dairy farming, poultry farming,
fishing business, organic farming, etc.

8. Other Areas:

1. Loans are also provided for other sectors under family employment, including
support for traditional and small-scale industries.
2. This helps in providing economic assistance to weaker sections and making them
self-reliant.
3. As a result, social harmony is maintained, and everyone gets opportunities for
progress in the business sector.
Objectives of Financial Assistance in the Primary Sector:
The main objectives of financial assistance in the primary sector are as follows

4. Poverty Eradication:
One of the main objectives of financial assistance in the primary sector is to reduce
poverty in the country. Through these financial schemes, financial help is provided
to the poor and weaker sections, which helps improve their standard of living.

5. Balanced Development:
Ensuring balanced development between urban and rural areas. Financial
assistance in the primary sector provides economic support to agricultural,
industrial, and small-scale enterprises, leading to regional economic growth.

6. Agricultural Sector Development:

Agriculture is one of the most important sectors of the Indian economy. Financial
assistance in the primary sector provides modern farming techniques, irrigation
facilities, and other support, leading to increased agricultural production and
productivity.

7. Encouraging New Enterprises:

Providing financial assistance to new enterprises helps them grow and establish
themselves in the market. This promotes local entrepreneurship and generates
employment opportunities.

8. Financial Equality:
Financial assistance ensures economic support to weaker sections, minorities,
women, self-help groups, and other backward communities. This helps reduce
economic disparity in society and promotes financial stability.

9. Education and Healthcare Development:

One of the main objectives of financial assistance in the primary sector is to provide
loans for students' education and to support healthcare services. This ensures
access to education and healthcare for all sections of society, leading to overall
social development.

10. Employment and Income Generation:

Through financial assistance, new employment opportunities are created, and
income generation is enhanced in sectors like agriculture, industry, and other allied
fields. This contributes to economic growth and stability.
11. Social and Economic Development:
Financial assistance in the primary sector strengthens all sectors of society. Special
focus is given to the poor and weaker sections. If financial aid is used properly, it
leads to social progress and overall national development.

Mandatory Guidelines for Financial Assistance in the Primary Sect or:

12. Target for PSL (Priority Sector Lending):

13.

1. The Reserve Bank of India (RBI) has set a specific target for banks regarding
primary sector lending.
2. All banks are required to allocate a minimum of 40% of their total lending to
the primary sector.
3. This includes agriculture, small industries, family employment, education,
health, and other sectors.
4.
14. Agriculture Lending:

1. Banks must allocate at least 18% of their total loans to agriculture.

2. While distributing agricultural loans, priority is given to small and marginal
farmers, tenant farmers, and those engaged in sharecropping. The loans are
provided based on their production capacity.

15. Small and Micro Enterprises Lending:

1. At least 7.5% of total loans must be given to small enterprises.

2. Guidelines for Micro, Small, and Medium Enterprises (MSMEs) are issued
separately.
3.
16. Micro Credit & Women Empowerment:

1. Providing loans to self-help groups (SHGs) and women is a primary focus

under financial assistance in the primary sector.
2. Loans are given for women's development and small family enterprises,
which contribute to their economic stability and social upliftment.
3.
17. Priority to Weaker Sections:

1. A specific percentage of financial assistance is allocated to economically

weaker sections.
2. This includes poor farmers, landless laborers, small-scale traders, artisans,
and other underprivileged communities.
3.
18. Loan Limits:

1. There is a maximum limit set for loans in different sectors.

2. For example, the maximum loan amount for farmers depends on their
production capacity, and financial institutions set repayment schedules
accordingly.
3.
19. Repayment Period:

1. The repayment period for loans in the primary sector is determined based on
the productivity of farmers or small industries.
2.
3. For agricultural loans, repayment periods are usually set between
two to five years.
20. For small enterprises, medium-term and long-term loans have flexible
repayment schedules.

8. Income-based Lending:

21. While distributing loans, it is essential to consider the income status of farmers and
small business owners.
22. This ensures proper loan distribution according to their financial capacity and future
potential.

9. Monitoring and Reporting by Banks:

23. Banks must monitor whether the primary sector loan distribution is being followed
as per the guidelines.
24. They must report this to the Reserve Bank of India (RBI) and other regulatory
authorities.
25. This helps assess banks' performance and track loan distribution in the primary
sector.
10. Revised Guidelines:

26. The Reserve Bank of India (RBI) and other regulatory bodies periodically revise
primary sector lending guidelines.
27. These improvements help strengthen the financial system and positively impact
social and economic structures.

Benefits of Primary Sector Lending:

Primary sector lending offers several key benefits, leading to both social and economic
stability. The main advantages include:

28. Agricultural Development:

1. Loans for the primary sector provide financial support to farmers. This helps
increase agricultural production and improve farming techniques.
2. Financial assistance for purchasing agricultural equipment and expanding
irrigation facilities enhances productivity.
29. Economic Equality:
1. Loans in the primary sector ensure financial support for economically
weaker sections, including farmers, small business owners, women, and
tribal communities.
2. This financial inclusion helps bridge economic disparities.
30.

3. Employment Generation:

31. When small businesses receive loans, their operations expand, creating jobs at the
local level.
32. Small enterprises, handicrafts, and self-employment opportunities grow as a result.
33. In rural areas, Self-Help Groups (SHGs) and women's groups benefit from loans,
improving their quality of life and generating new job opportunities.

4. Industrial Development:

34. Loans for small and micro-enterprises encourage their growth. This helps develop
industries at the local level and increases productivity.
35. Production capacity improves, making local businesses more competitive.
5. Promotion of Education:

36. Loans in the primary sector provide financial support for students' higher education.
This helps students from financially weaker backgrounds pursue education without
restrictions.
37. School, college, and vocational training loans contribute to skill development,
producing a well-educated and skilled workforce for the nation.

6. Healthcare Services:

38. Loans in the primary sector support the establishment of hospitals, clinics, and
other healthcare institutions.
39. Medical facilities, especially in rural areas, become more accessible, improving
overall public health.

7. Environmental Protection:

40. Financial aid for agriculture promotes the adoption of modern farming techniques,
leading to environmentally sustainable practices.
41. This helps maintain ecological balance and improves long-term agricultural
productivity.

8. Poverty Reduction:

42. Loans for poor and economically weaker sections reduce financial disparity.
43. Providing financial assistance to marginalized communities improves their
economic stability and quality of life.

9. Social Equality Promotion:

1. Loans help ensure social equality, particularly by supporting employment and

financial assistance for rural women and people in remote areas.
2. Primary sector lending creates equal opportunities for different social groups,
contributing to overall development.

10:Use of Modern Technology:

3. Loans in the primary sector encourage the use of modern technology in agriculture
and small industries. This increases production capacity and improves efficiency.
4. Advanced machinery and technology enhance the production process, leading to
significant transformation in other sectors as well.
5.

Progress of Financial Inclusion in India

Financial inclusion means providing access to banking services, credit, insurance,
payment systems, and other financial tools to all sections of society. Its goal is to integrate
the weaker sections of society into the financial system, ensuring their economic
development. Financial inclusion has become a key policy objective for the government
and the Reserve Bank of India (RBI). Several measures have been taken to strengthen
financial services and improve financial literacy. Below are some major initiatives that have
significantly contributed to financial inclusion in India:

1. Pradhan Mantri Jan Dhan Yojana (PMJDY)

6. Pradhan Mantri Jan Dhan Yojana (PMJDY) is an important scheme launched in 2014.
7. It aims to provide universal access to banking services, including opening zero-
balance bank accounts.
8. The scheme also provides accidental insurance coverage and overdraft facilities,
which enhance financial security and stability for the poor.

2. Aadhaar-Based Financial Inclusion

9. The Aadhaar system has played a crucial role in financial inclusion in India.
10. Aadhaar-linked bank accounts enable direct benefit transfers (DBT), reducing
leakage in government subsidies and welfare schemes.
11. It has simplified processes for availing banking services, insurance, and payments.

3. Expansion of Digital Payment Systems

12. The growth of digital payment systems has increased access to financial services.
13. Platforms like Unified Payments Interface (UPI), BHIM App, and Aadhaar-enabled
payment systems (AEPS) have simplified digital transactions, making financial
services more inclusive and accessible.
4. MUDRA Scheme

14. Launched in 2015, the MUDRA scheme has been instrumental in supporting small
and medium enterprises (MSMEs).
15. This scheme provides low-interest loans to small businesses, helping them grow
and expand.
16. It has significantly benefited micro-entrepreneurs and self-employed individuals,
boosting economic activity and job creation.