Financial inclusion through the lens of CRISIL Inclusix

Financial inclusion is a key enabler of economic and social development. The effectiveness of the financial inclusion agenda in India can be significantly enhanced if there are objective ways to measure it. CRISIL, therefore, decided to create a tool that would help policy-makers, regulators, and financial sector intermediaries at large in measuring the extent of financial inclusion, both at a broader, and disaggregated level. This vision was the genesis of CRISIL Inclusix – India’s first comprehensive measure of financial inclusion in the form of an index. In creating this index, CRISIL has leveraged its knowledge of the financial services sector and expertise in creating world-class analytical frameworks and indices.

CRISIL Inclusix is a comprehensive measure of financial inclusion

CRISIL Inclusix is a one-of-its-kind tool to measure the extent of financial inclusion in India. CRISIL Inclusix has a comprehensive coverage, covering all 35 states and union territories, right down to each of the 632 districts as on March 2011. It is a relative index on a scale of 0 to 100, and combines three critical parameters of basic banking services — branch penetration, deposit penetration, and credit penetration —into one metric.

The unique feature about CRISIL Inclusix is its use of non-monetary aggregates whilst calculating financial inclusion. Till now, most of the measures of financial inclusion have focused on an analysis of either the aggregate amount of deposits or loans in a particular region. Whereas, CRISIL Inclusix uses parameters that focus only on the ‘number of people’ whose lives have been touched by various financial services, rather than on the ‘amounts’ deposited or loaned. This helps negate the disproportionate impact of a few high-value figures on the overall picture.

CRISIL has developed this index with support from the Reserve Bank of India (RBI) and the Ministry of Finance. The index is an outcome of nearly two years’ effort in developing the methodology and rigourous analysis spanning over 2,00,000 data points across 165 banks. Data for computing the index was provided by RBI. The latest data available is as at March 2011.

The index is scalable and can include additional parameters

Currently the index has been calculated based on the data related to the banking system (scheduled commercial banks and regional rural banks). The index is scalable and can accordingly accommodate additional parameters or other forms of financial services. Over time, as consistent and comprehensive data becomes available, the index can be made more multidimensional. For instance, when the data related to NBFCs or MFIs becomes available, this can be incorporated in calculating financial inclusion. The index also has the flexibility to include other forms of financial services such as insurance and pension. We are already in discussions with other regulators and industry associations for sourcing relevant, consistent and comprehensive data.

CRISIL Inclusix uses robust methodology

CRISIL Inclusix follows a robust, transparent, and yet easy to understand approach. Its methodology is similar to other global indices, such as UNDP’s Human Development Index. CRISIL Inclusix is a relative index that incorporates various forms of basic financial services, listed in the chart below, into one single metric.

CRISIL Inclusix uses five parameters to measure the three key dimensions of financial inclusion (namely, Branch Penetration, Deposit penetration and Credit Penetration).

The calculation of CRISIL Inclusix follows a two-step process, starting with the normalisation of parameters. After the normalization process, the parameter indices become independent of units and dimensions; thus they can be aggregated with relative ease. In this process, CRISIL Inclusix employs a modified version of the ‘Min-Max’ method, which facilitates inter-temporal comparison of the index. The maximum is defined as the ideal value for each parameter.

The second step entails the aggregation of the three dimensions, each representing the three parameters (BP, CP, and DP) used in the analysis. In the step, the Euclidean Distance Method is used to calculate the distance between any two points in an ‘n-dimensional’ space. This method of aggression satisfies all intuitive properties of an index such as Normalisation, Anonymity, Monotony, Proximity, Uniformity, and Signaling (or NAMPUS in short).

Key highlights

The key findings of the analysis are:

• Low, albeit improving overall score: The all-India CRISIL Inclusix score of 40.1 is relatively low. It is a reflection of under-penetration of formal banking facilities in most parts of the country. It 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 has access to banking credit. In fact, the bottom 50 scoring districts have just 2 per cent of the country’s bank branches. However, there are clear signs of improvement in the CRISIL Inclusix score over the past three years – to 40.1 in 2011, from 37.6 in 2010 and 35.4 in 2009. It is also encouraging to note that 618 out of 632 districts reported an improvement in their scores during 2009-2011.
• Wide disparity in financial inclusion: Wide disparities exist across India and within states in terms of access to financial services. India’s six largest cities have 11 per cent of the country’s bank branches. At the other end of the scale, there are four districts in the North-Eastern region with only one bank branch each.
• Deposit penetration is the key driver of financial inclusion: The number of savings bank accounts, at 624 million, is close to four times the number of loan accounts at 160 million.
• More focus on Credit Penetration (CP) is needed: Overall financial inclusion is constrained by lack of CP. CP score is the least amongst all three parameters across all regions, except South.
• Encouraging improvement in branch efficiency: In the bottom 50 districts, there is an encouraging improvement in branch efficiency. In these districts, the number of savings deposit accounts per branch has improved by 20 per cent to 6,073 as on March 2011 from 4,919 as on March 2009.
• Southern Region shows highest financial inclusion: The Southern region leads the financial inclusion drive in the country, with a CRISIL Inclusix score of 62.2 in 2011. Six out of the top 10 states with the highest CRISIL Inclusix score are from the Southern region. Southern region leads across all three dimensions of financial inclusion. This region has highest credit penetration — the number of loan accounts per lakh of population at 17,142 in the Southern region is nearly twice of the all-India average.
• Top states/ Union Territories and districts

Benefits and uses of CRISIL Inclusix

CRISIL Inclusix provides a bird’s eye view of the state of financial inclusion in India. At the same time, it gives ground-level information on the progress made on the inclusion front even in the remote districts of rural India. This two-pronged approach holds immense potential for policy-makers, regulators, and bankers as it helps to identify priorities, design focused programmes to push the inclusion agenda and most importantly, measure the progress made.

CRISIL will update this analysis on a regular basis to monitor progress. CRISIL will also endeavor to make the index more comprehensive in future by adding additional parameters and/or providers of financial services as and when comprehensive and reliable data becomes available.