Northeast and its Success Story of Financial Inclusion

Policy Update
Aaswash Mahanta

Abstract

Northeast India has made remarkable strides in financial inclusion, overcoming historical economic challenges through enhanced banking and financial access. With state-led initiatives and technological advancements, the region has seen a significant increase in bank branches, digital transactions, and financial literacy. The Jan-Dhan Yojana and other programs have boosted bank account penetration and access to formal credit, aiding small businesses and entrepreneurs. Credit growth in the service and agriculture sectors has outpaced the national average, while financial literacy improvements have reduced financial exploitation. These advancements highlight the transformative impact of the banking sector on Northeast India’s economy, though challenges remain.

Introduction

Financial institutions worldwide have significantly impacted societies, helping overturn social and economic challenges. Throughout history, major industries have been contributing to the brunt of growth. Be it the Green Revolution, the Industrial Revolution from the past or the current digital revolution, the banking and finance sector has remained the backbone of development and growth. In the 21st century today, the contribution of technology to growth remains unmatched.

Over time, our thoughts on growth have been challenged, our perception of development has changed, and our approach to social welfare has evolved. But among all these, banking has been the sole sector to grow consistently in an upward trajectory while enhancing economic pace and progress. With the advent and popularization of the free market in the 1980s-90s, there was a boom in microcredit. More economists got inclined towards the idea that inequality and poverty can be tackled by granting people access to free market and financial instruments. The sector undoubtedly has been an integral part of the neo-liberal project, as studies show a strong causal relationship between ‘banking penetration’ and ‘socio-economic development’

Context of Northeast India

The Northeastern part of India is well known for its untapped reserves of natural capital, its geostrategic location, and as a biodiversity and tourism hotspot. While ethnic tensions and conflict have been the biggest hurdles fencing the region, peace and conflict resolution mechanisms in the past two decades have been successful in bringing around renewed vigor to enhance the economic potential and capabilities^[1]. The banking sector in the region particularly has seen pivotal transformations in the past decade, supplemented by ever-expanding technological progress.

The post-independence development agenda of the Northeast has been largely state-led. The scope for private capital has been minimal and is relatively new. A general lack of enterprising private stakeholders only meant that the region thrived primarily on subsistence. It is established that state capacity alone cannot cater to the employment needs of a diverse population such as that of Northeast India. Hence, scaling up investment frameworks becomes imperative to facilitate robust employment, especially at a time when there is a pull of workforce from rural to urban sectors.

Within this purview, access to credit for small business units and entrepreneurs becomes a driving force in attaining employment targets, growth, and economic security^[2]. For such robust facilitation, credit needs to be democratized and made more inclusive for the entire population.

Assessing Banking Penetration and Financial Inclusion in Northeast India

A report by RBI, titled National Strategy for Financial Inclusion (NSFI): 2019-2024, puts forward three basic pillars to evaluate financial inclusion. The analysis in this article is premised on these three pillars that provide a fundamental understanding of how banking and finance have penetrated the region. These three areas are as follows:

1. Accessibility (Digital and Physical Points of Access): Accessibility is the foundation on which all human capabilities exist. Amartya Sen’s theory of justice and human development is based on the necessity of basic access to resources that can enhance capabilities. Within this context, access to banking services is crucial in improving human development metrics. In this case, metrics such as the number of bank accounts and outlets per 1 Lakh population provide a comprehensive understanding of financial access in the region. An increase in accessibility has two major implications:
   • Lower Informational Asymmetry: Individuals become familiar with financial instruments, thereby becoming financially literate. This is an important aspect considering the historical context of the northeast, a region that has only opened to global market systems in the recent decade.
   • Lower barriers/ frictions to banking and financial markets: Frictions in the financial markets act as barriers to banking capabilities for individuals and therefore, play a critical role in creating poverty traps and increasing income inequality (Banerjee and Newman 1993; Galor and Zeira 1993). Again, the northeastern states are relatively new to market-based incentives and development trajectories.

1.1 One of the major components of the analysis about accessibility focuses on physical access to a banking unit/outlet. The rationale behind such measurement is that access to technology and internet connectivity is limited in the region. Thus, physical banking services are more feasible in the region. State-wise data from RBI provides a compelling picture of the increase in the physical accessibility of banking services in the Northeast in the past decade.

1.2 Regional Rural Bank Branches: Being an Agri-driven economy, availability of capital is essential to transition from subsistence to commercial production in the Agriculture and Allied sectors. In this case, the fundamental role of RRBs is to provide financial assistance and loans to farmers and to sustain rural livelihoods (RRB Act, 1975).

As of 2013, there were approximately 1.4 RRB branches per 1 Lakh population in the Northeast. This has increased to almost 1.8 branches per 1 Lakh population compared to a national density of 1.5 branches. Interestingly, RRBs per 1 Lakh population have more than doubled in Arunachal Pradesh, Mizoram, and Meghalaya since 2013. Among all northeastern states, Arunachal has seen the highest increase of 62% in the last 10 years. On the contrary, while the RRBs are increasing in the entire region, the penetration of RRBs has declined in Manipur.

1.3 The success of Commercial Banking: One of the most notable successes of the last 10 years in the northeast has been the large-scale penetration of scheduled banks in the northeast. In terms of absolute increase in SCB offices, a comparison between India and NER shows that there was a 54% increase in the number of offices in India over the last 10 years, as against a whopping 88% increase in SCB offices in the NER at the same time. Among the NER states, Manipur had the least number of SCBs – 94 in 2012, but has crossed Mizoram, Nagaland and Arunachal Pradesh with the number of SCBs in the state growing by the average rate of 9%.

2. Usage (formal deposits, formal credit, number of transactions (cash, cashless, and digital), frequency of transactions): Metrics such as the percentage of adults with a savings account in a formal institution, the percentage of adults with access to credit, and the percentage of MSMEs having access to formal credit, among others can be used to assess the usage of financial institutions and instruments.

• Number of Digital Payments Transactions: one of the areas of concern in the Northeast historically has been the lack of technological access. But as the region opens to newer investments, trade opportunities are rising exponentially, thereby increasing the scope for sectors such as Information Technology. Better access to technology means faster adoption of digital financial services and a larger volume of formal transactions. In the northeast, the number of digital transactions per capita has been relatively low, compared to the national average. Among all the NE states, Sikkim had the highest per capita number of digital transactions as of 2023.

• Volume of credit: The growth rate of credit by SCBs in NER has surpassed the national growth rate between 2013 to 2022. Credit by SCBs has more than doubled in the country but the increase has almost tripled in the Northeast. Among the NE states, Manipur experienced the highest increase in credit whereas Meghalaya recorded the lowest growth in the volume of credit from Scheduled Commercial Banks.
  
  It is observed that state-wise credit by SCBs has been growing over the last decade, driven primarily by a substantial increase in credit to the service sector. The credit provided in agriculture and industry has grown at a similar rate but does not contribute substantially to the total credit share. The total increase in credit was highest in the services sector followed by the agriculture sector, whereas credit to industries was lower than the national share. Credit being given in the service sector holds the major proportion of the total credit being provided in NER.
  
• Credit-to-Deposit Ratio: In Scheduled Commercial Banks, the credit-to-deposit ratio has been steadily increasing in the Northeast, meaning that the demand for credit in the region is getting higher, a positive sign for investors and businesses to expand their footprint in the Northeast. Among the Northeastern States, Manipur has experienced a huge leap from 29% in 2013 to 66% in 2022. Five of the Northeastern states fall below the NER average of CD ratio at 46%, with Arunachal and Meghalaya having the lowest CD rations of 25% and 32% respectively.
  
  However, as far as Regional Rural Banks are concerned, there is a decline in the CD ratio from 49 in 2013 to 43 in 2022. One of the key roles of RRBs has been to facilitate credit and financial assistance to farmers and for rural livelihood creation. With new aspirations of doubling farmers’ income (DFI), the amount of credit being devolved by RRBs must rise to meet such aspirations. But one outlier state that has seen a steady increase in the volume of credit is Manipur. The state has seen a 37% increase in CD ratios for SCBs and a whopping 141% increase for RRBs.
  
• Sector-wise Credit Growth in the Northeast: Sector-wise distribution of credit is a good metric to understand if the flow of capital to niche sectors is sufficient or not. Here, we specifically look at the credit given by SCBs to agriculture, industries, and services. A comparative analysis shows that credit to agriculture by SCBs has increased by 239% in the Northeast as against an all-India increase of 200%. Even for Industries, the growth in credit in the Northeast stands at around 95% as against an all-India increase of 68%.
  
  But, in terms of the share of credit, we notice that most of the total credit is going to services. The share of credit to the service sector has been more than 50%, which has further increased over the last few years. Initially, the credit received by the Agriculture and Industry sectors was somewhat equal, but the recent trend implies a decrease in credit to industries. While the credit contribution in the agriculture sector has not been reduced with a large difference, credit in the industry sector has reduced by more than 50% in the last 10 years, which has been covered by credit being provided in the services sector.

3. Quality: Factors such as financial literacy and the existence of grievance redressal mechanisms are the main constituents of quality^[6]. Individuals with a higher level of financial literacy are less vulnerable to being exploited or deceived (Campbell et al., 2011; Lusardi and Mitchell, 2011; Deevy et al., 2012; de Bassa Scheresberg, 2013; Balloch et al., 2015; Andreou and Philip, 2018), less prone to over-indebtedness (Lusardi and Tufano, 2015; Andreou and Philip, 2018), better at retirement planning (Lusardi and Mitchell, 2007; van Rooij et al., 2012), participate more often in financial markets (van Rooij et al., 2011; Balloch et al., 2015) and have higher returns on savings accounts (Deuflhard et al., 2018).

RBI’s National Financial Inclusion Strategy also highlights financial literacy as one of the key pillars to enhance the quality of financial and banking services. RBI mentions a minimum target score or minimum threshold score in each of the components of financial literacy prescribed by OECD-INFE [i.e., a minimum of 3 in Financial Attitude (out of 5), 6 in Financial Behavior (out of 9) and 6 in Financial Knowledge (out of 9). In a zone-wise survey by the RBI, as of 2019, the Northeast was the second highest in terms of the percentage of population crossing the minimum threshold score of financial literacy. This is a stark improvement in contrast to 2013 levels when it was the second lowest.

Policy Implications

The policy implications for Northeast India, considering the dynamics in financial inclusion and banking penetration, are multi-faceted. Some of them include the following:

1. Enhancing Digital Infrastructure: Investment in expanding internet connectivity and digital infrastructure is crucial to support the growing number of digital transactions and improve accessibility to financial services in remote areas. For states like Assam and Tripura, stakeholders need to leverage the relatively higher digital transaction volume by enhancing digital infrastructure. For states like Nagaland and Mizoram, there is scope to increase digital literacy and access to internet services to improve the low number of digital transactions.
2. Strengthening Physical Banking Presence: Continued expansion of Regional Rural Banks (RRBs) and Scheduled Commercial Banks (SCBs) to ensure physical access to banking services, particularly in areas with limited internet access. States like Arunachal Pradesh, Meghalaya, Manipur, Nagaland need special attention in this regard.  
3. Promoting Financial Literacy and fostering Inclusive Growth: There is an imperative to promote financial literacy programs to educate the population on financial management, reducing vulnerability to financial exploitation^[7] and enhancing economic decision-making skills, in all NE states
4. Supporting Small Businesses and Entrepreneurs and Encouraging Sector-Specific Credit Growth: Developing targeted credit schemes and financial support programs for small businesses and entrepreneurs to encourage economic growth and job creation, particularly in rural and underserved areas would be crucial in the days to come. Broadly, there is a  need to tailor credit policies to support key sectors such as agriculture, services, and industries, aligning with the region’s economic strengths and development needs.

Conclusion and Way Forward

Given the high pace of banking penetration in the region, the Northeast is undoubtedly the next frontier of economic development and growth in India. In the past few years, as we have seen from the data, better access to banking and financial services, coupled with the establishment of digital public infrastructures and better connectivity, the objectives of last-mile delivery, strengthening of local institutions, enhanced financial literacy and consumer awareness are steadily being realized. There has been a substantial increase in the number of bank branches, including Regional Rural Banks (RRBs) and Scheduled Commercial Banks (SCBs), per capita, enhancing physical access to banking services and reducing barriers for the local population.

Digital accessibility has also improved, with a noticeable increase in digital transactions, particularly in Sikkim. Financial inclusion has been bolstered by initiatives like Jan-Dhan Yojana, leading to a rise in bank account penetration and access to formal credit, which supports small businesses and entrepreneurs. Credit growth in the region has outpaced the national average, particularly in the service sector, which now receives most of the total credit.

The agriculture sector has also seen substantial credit growth, though the industry sector’s share has decreased. Financial literacy rates have improved significantly, reducing vulnerability to financial exploitation and enhancing financial management skills. The quality of financial services has been enhanced by higher financial literacy and effective grievance redressal mechanisms, ensuring individuals are better informed and protected. Despite significant progress, some of the longstanding legacy issues persist. These include lack of internet services in remote areas, language barriers, lack of resilient livelihoods due to frequent floods, landslides among others, lack of agricultural diversification, and lack of disposable income, among others.

Addressing these issues through continued enhancement of financial infrastructure and services is crucial for sustained development. These collective improvements highlight the transformative impact of the banking sector on Northeast India’s economy, demonstrating significant progress in accessibility, usage, and quality of financial services while acknowledging the ongoing challenges that need to be addressed.

References

1. Sen, A. (1999). Development as Freedom. New York: Knopf.
2. Banerjee, A. V., & Newman, A. F. (1993). Occupational choice and the process of development. Journal of Political Economy, 101(2), 274-298.
3. Government of India. (2014). Pradhan Mantri Jan-Dhan Yojana (PMJDY). Retrieved from PMJDY website.
4. Reserve Bank of India. (2023). Data on Regional Rural Banks (RRBs) and Scheduled Commercial Banks (SCBs). Retrieved from RBI website.
5. DigiDhan Dashboard. (2023). Data on Digital Transactions. Retrieved from DigiDhan Dashboard website
6. OECD-INFE. (2015). National Strategies for Financial Education: OECD/INFE Policy Handbook.
7. Campbell, J. Y., Jackson, H. E., Madrian, B. C., & Tufano, P. (2011). Consumer financial protection. Journal of Economic Perspectives, 25(1), 91-114.

About the contributor: Aaswash Mahanta is an incoming Master of Public Policy Candidate, Batch of 2026, at the Hertie School of Governance, Berlin.

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