Financial Inclusion in India: Jan Dhan Yojana, MUDRA, SHGs, Microfinance, Digital Payments, and Priority Sector Lending (UPSC Prelims + Mains)

Financial Inclusion in India: Jan Dhan Yojana, MUDRA, SHGs, Microfinance, Digital Payments, and Priority Sector Lending (UPSC Prelims + Mains)

Why this topic matters for UPSC

Financial inclusion means making basic financial services available, affordable, and usable for every citizen—especially the poor, rural households, women, small farmers, and small businesses. For UPSC, this topic connects directly to inclusive growth, poverty reduction, women empowerment, MSME development, Digital India, and governance through DBT. It is also linked to SDGs because access to savings, credit, insurance, and payments supports better health, education, livelihoods, and resilience against shocks.

1) Concept and dimensions of financial inclusion

(A) What exactly is "inclusion" in finance?

Financial inclusion is not just opening accounts. It has three practical layers:

• Access: A person can reach a bank/BC point, open an account, and get a payment instrument.
• Usage: The person actually uses the account for savings, remittances, payments, and credit (not just a "zero-balance dormant account").
• Quality: Services are reliable, safe, transparent, affordable, and supported by grievance redressal and consumer protection.

(B) Why markets alone do not automatically deliver inclusion

Low-income households often face barriers like lack of documents, low and irregular income, distance, low literacy, and high transaction costs. Private lenders and informal moneylenders fill this gap, but at high interest and sometimes exploitative conditions. That is why the state and the regulator (RBI) actively shape inclusion using:

• public infrastructure (bank branches, BCs, digital rails),
• policy nudges (PSL targets),
• social security + DBT (to make accounts useful),
• regulated microfinance (to prevent over-indebtedness).

2) Evolution of financial inclusion in India

(A) Early foundations (post-independence to 1990s)

• Social banking phase: Bank nationalisation, branch expansion, and directed lending aimed at rural and weaker sections.
• Institution building: RRBs (to serve rural credit needs), cooperative banks, and NABARD's role in rural development finance.
• Priority sector idea: Formal recognition that certain sectors (agriculture, small units, weaker sections) need assured credit flow.

(B) The SHG and microfinance phase (late 1980s onwards)

A major Indian innovation was the SHG-Bank Linkage Programme, initiated as action research by NABARD in 1989, creating a bridge between poor women's groups and formal banks.

(C) The RBI-led financial inclusion planning (2000s)

In the 2000s, RBI pushed structured financial inclusion using branch expansion, simplified accounts, and the Business Correspondent (BC) model to reach the last mile. RBI issued guidelines on using Business Facilitators/Correspondents to extend banking services beyond branches.

(D) The "JAM + Digital rails" phase (2010s onwards)

From the mid-2010s, India combined mass account opening (PMJDY), Aadhaar-based identity and e-KYC, and mobile + digital payments (especially UPI) to move from "access" to "usage at scale." This phase also strengthened welfare delivery through DBT, and expanded microcredit using MUDRA.

3) Where does India stand today? (Status and measurement)

(A) RBI's Financial Inclusion Index (FI-Index)

RBI's Financial Inclusion Index tracks progress across access, usage, and quality (covering banking, investments, insurance, postal, pension). The index value increased from 64.2 in March 2024 to 67 in March 2025, showing steady improvement.

(B) The big picture: accounts + credit + digital payments

India's inclusion story is best understood as a combined outcome of:

• Account ownership (PMJDY and other basic savings accounts),
• Targeted small credit (MUDRA, SHGs, microfinance),
• Digital transaction capability (UPI and related systems),
• Directed credit flow through PSL targets and sub-targets.

4) PM Jan Dhan Yojana (PMJDY) and JAM Trinity

(A) What is PMJDY?

PMJDY is the National Mission on Financial Inclusion, aimed at providing a basic bank account for every unbanked adult, along with financial services such as remittance, insurance, pension, and access to credit in a simplified manner. It is the foundation layer for DBT and wider social security coverage.

(B) Key features (UPSC-ready)

• Zero-balance account (no minimum balance requirement).
• RuPay debit card with in-built accident insurance cover (commonly cited as ₹2 lakh for RuPay card linked PMJDY accounts in many official summaries).
• Overdraft facility up to ₹10,000 for eligible account holders (with policy modifications like no conditions for OD up to ₹2,000 and revised age limit 18–65).
• Linkages to DBT and social security schemes (PMJJBY, PMSBY, APY) and MUDRA.

(C) Latest PMJDY progress (use in Mains answers)

As per the PMJDY dashboard/progress reporting, the scale of coverage is extremely large. The PMJDY portal reported 57.49 crore beneficiaries banked and an account balance of about ₹287,578.31 crore (displayed on the portal).

On the PMJDY progress-report page (beneficiaries as on 14 January 2026), key bank-type totals include: Public Sector Banks with about 44.50 crore beneficiaries and deposits of about ₹225,825.18 crore; RRBs with about 10.84 crore beneficiaries and deposits of about ₹53,360.77 crore; and Private Sector Banks with about 1.96 crore beneficiaries and deposits of about ₹8,392.34 crore.

Source: PMJDY progress-report.

(D) Why PMJDY is more than "account opening"

PMJDY becomes meaningful when it is connected to real economic activity. The biggest impact areas are:

• DBT and welfare delivery: Reduces leakages, improves speed, and supports targeted transfers (especially during emergencies).
• Formal savings habit: Even small balances create resilience in shocks.
• Payments and remittances: RuPay + UPI access reduces cash dependence.
• Small credit entry point: OD + linkage to microcredit and SHGs supports consumption smoothing and micro-enterprise support.

(E) Key limitations to mention (balanced answer)

• Dormancy/inactivity: Some accounts may remain unused unless benefits and local cash-in/cash-out points exist.
• Last-mile service quality: BC outages, cash shortages, and trust issues can reduce usage.
• Re-KYC compliance: A large base needs periodic updating of customer details to remain fully functional.

5) MUDRA (PMMY) and micro-enterprise credit

(A) Why small credit matters for inclusion

Access to a bank account solves payments and saving. But credit access is what enables livelihood expansion—buying a sewing machine, adding stock in a kirana shop, purchasing a small motor/pump, or setting up a service micro-unit. For India, micro and small businesses create large employment, so microcredit directly supports inclusive growth.

(B) What is MUDRA/PMMY?

Pradhan Mantri MUDRA Yojana (PMMY) supports microcredit to non-corporate, non-farm micro enterprises. MUDRA is also an institutional mechanism that supports refinance and broader micro-enterprise lending.

(C) Loan categories (very important for Prelims)

MUDRA loans are commonly categorised as:

• Shishu: loans up to ₹50,000
• Kishore: loans above ₹50,000 and up to ₹5 lakh
• Tarun: loans above ₹5 lakh and up to ₹10 lakh

These categories are listed on the MUDRA offerings page.

(D) Latest performance snapshot (use in Mains data)

As per the MUDRA portal for FY 2024–25, the number of PMMY loans sanctioned was about 5.47 crore (54,661,648), with a sanctioned amount of about ₹5,52,801.78 crore.

On a longer horizon, a PIB release noted that since launch (April 2015) PMMY has sanctioned 52+ crore loans worth about ₹32.61 lakh crore (as stated in that release).

(E) How MUDRA supports inclusion

• Brings informal business into formal credit: small ticket size suits micro entrepreneurs.
• Women entrepreneurship: often a large share of borrowers are women (use as a gender inclusion point if you have latest dataset, otherwise argue conceptually).
• Employment creation: micro units generate local jobs and self-employment.
• Credit history building: repeat repayment creates a formal credit score footprint.

(F) Key concerns (must mention in balanced answers)

• Credit quality and stress: small borrowers are vulnerable to shocks; monitoring NPAs and responsible lending is important.
• Multiple borrowing: overlap with microfinance can create over-indebtedness.
• Usage of loan: sometimes borrowed for consumption rather than productive investment—needs better counselling and financial literacy.

6) SHGs, NRLM, and SHG-Bank Linkage Programme

(A) Why SHGs are central to inclusion

In many rural areas, the main barrier is not only distance but also trust, lack of collateral, and low formal documentation. SHGs solve this through group discipline, regular savings, and peer monitoring. SHGs also build social capital—women learn to handle accounts, meetings, and collective decisions.

(B) DAY-NRLM: the national framework for SHGs

Deendayal Antyodaya Yojana – National Rural Livelihoods Mission (DAY-NRLM) is a flagship programme of the Ministry of Rural Development that mobilises rural poor households—especially women—into SHGs and supports livelihoods and financial inclusion.

A PIB release highlighted that DAY-NRLM has mobilised about 10.05 crore rural households into about 90.9 lakh SHGs across India, and deployed 47,952 Bank Sakhis to support financial inclusion and credit access.

(C) SHG-Bank Linkage: how it works (step-by-step)

• Step 1: Group formation and savings discipline (regular meetings, record keeping).
• Step 2: Internal lending using group savings to build credit culture.
• Step 3: Grading/assessment by implementing agencies/banks based on performance.
• Step 4: Bank linkage where banks provide a group loan/cash credit facility.
• Step 5: Repeat linkage where good repayment leads to higher loan limits and better terms.

(D) Why SHGs are powerful beyond credit

• Women empowerment: voice in household decisions, confidence, mobility.
• Social outcomes: SHGs often become platforms for sanitation, nutrition, education awareness.
• Market linkage: federations help SHG products reach markets (local haats, e-commerce tie-ups in some states).
• Risk sharing: collective support during health shocks, crop loss, or income disruptions.

7) Microfinance: models, benefits, and RBI regulatory framework

(A) What is microfinance?

Microfinance provides small, collateral-free financial services to low-income households and micro-entrepreneurs. It includes not only loans but also savings, insurance, and payments support (though in India "microfinance" is often loan-focused).

(B) Main delivery models in India

• SHG-based microfinance: Banks lend to SHGs (SBLP), group manages internal lending.
• Joint Liability Groups (JLGs): Small borrower groups jointly guarantee repayment.
• NBFC-MFIs: Specialised microfinance institutions regulated under RBI frameworks.

(C) Why microfinance supports inclusion

• Credit where formal banks find high cost: last-mile delivery and small ticket sizes.
• Women-focused outreach: many microfinance loans target women borrowers.
• Income smoothing: helps manage irregular cash flows and emergencies.

(D) The risks: why regulation matters

Microfinance can fail its inclusion purpose if it becomes aggressive, opaque, or pushes borrowers into multiple loans. Over-indebtedness can trap households rather than empower them. This is why RBI's framework stresses repayment capacity assessment, transparency, and borrower protection.

(E) Key RBI regulatory ideas (UPSC points)

• Household repayment capacity cap: RBI's microfinance framework includes a ceiling where total monthly loan repayment obligations of a household should not exceed 50% of monthly household income.
• Interest rate transparency: RBI requires lenders to display minimum/maximum/average interest rates and improve transparency.
• No prepayment penalty: RBI FAQ states there is no pre-payment penalty on microfinance loans (as per the updated FAQ page).

8) Digital Payments and financial inclusion

(A) Why digital payments are a "big leap" for inclusion

Payments are the most frequent financial activity for ordinary households. If payments become cheap and instant, inclusion improves rapidly. Digital payments help because they:

• reduce dependence on cash (safer, traceable),
• enable small value transactions easily,
• support DBT usage and merchant acceptance,
• create transaction history that can help credit assessment.

(B) What is UPI and why it matters?

UPI is a real-time payment system developed by NPCI that enables instant account-to-account transfers using mobile apps. It made digital payments simple for both individuals and small merchants.

(C) Latest UPI statistics (use as strong Mains data)

NPCI's UPI product statistics show that in December 2025, UPI recorded about 21,634.67 million transactions (around 21.6 billion) with a value of about ₹27,96,712.73 crore (about ₹28 lakh crore).

(D) Digital payments growth across the economy

A PIB release (Department of Financial Services) noted that total digital payment transaction volume increased from about 2,071 crore in FY 2017–18 to about 22,831 crore in FY 2024–25 (CAGR ~41% as stated), and value rose from about ₹1,962 lakh crore to about ₹3,509 lakh crore.

(E) Inclusion tools linked to payments

• AePS (Aadhaar-enabled Payment System): helps cash-in/cash-out via BCs using biometrics.
• RuPay cards: card access for basic accounts, supports merchant payments.
• BBPS: bill payments for utilities, helps households pay digitally.
• Feature phone solutions: important for rural areas where smartphones are not universal.

(F) Risks and safeguards (important for Mains)

• Fraud and cyber risk: rising scams can reduce trust and adoption.
• Digital divide: women, elderly, remote populations may face barriers.
• System outages: reliability matters for "quality of inclusion."

9) Priority Sector Lending (PSL): targets, sub-targets, and PSLC

(A) What is Priority Sector Lending?

Priority Sector Lending is a regulatory policy where banks must lend a specified share of their credit to sectors that are crucial for inclusive growth but may be underserved by markets—like agriculture, micro enterprises, education, housing (within limits), renewable energy, and weaker sections.

(B) Core RBI targets (Master Directions 2025)

As per the Master Directions – Priority Sector Lending – Targets and Classification (2025):

• Total PSL target: 40% of ANBC (or CEOBSE, whichever is higher) for domestic commercial banks and foreign banks with 20+ branches.
• Agriculture: 18% of ANBC/CEOBSE, with sub-targets for non-corporate farmers and small & marginal farmers indicated in the table.
• Micro enterprises: 7.5% of ANBC/CEOBSE.
• Weaker sections: 12% of ANBC/CEOBSE (for domestic commercial banks).
• Urban Cooperative Banks (UCBs): total PSL target 60% (as per the directions table).

Source: RBI Master Directions (PSL) 2025.

(C) Why PSL strengthens financial inclusion

• Forces credit to flow to segments where market incentives are weak.
• Supports agriculture and micro-enterprises which are employment-heavy sectors.
• Encourages innovations (co-lending, on-lending, BC channels) because banks must meet targets.

(D) Priority Sector Lending Certificates (PSLC)

PSLCs allow banks that exceed PSL targets to sell certificates to banks that fall short, improving efficiency without changing the underlying lending. RBI issued instructions for trading in PSLCs, and RBI FAQs note that PSLCs expire by March 31 each year.

10) Institutional ecosystem enabling inclusion

(A) Banks and specialised institutions

• Public sector banks: major role in PMJDY coverage and rural outreach.
• RRBs and cooperative banks: crucial for rural and agricultural credit.
• Small Finance Banks (SFBs) and Payment Banks: niche inclusion models (small deposits, payments, small ticket loans depending on license conditions).
• NABARD: key institution in rural credit, SHG linkage history, and development finance.
• SIDBI/MUDRA: support MSME and micro-enterprise finance ecosystems.

(B) BC network as the "last mile"

BCs reduce the need for a physical branch in every village. This matters because branch banking is expensive in low-density areas. RBI's BC guidelines aimed exactly at extending banking services using intermediaries.

(C) Community institutions (SHGs, Bank Sakhis)

DAY-NRLM's scale and the deployment of Bank Sakhis shows how inclusion is strengthened when community workers support households and women-led groups.

11) Impact: how financial inclusion changes society and the economy

(A) Inclusive growth and poverty reduction

• Better savings and risk management: households can buffer shocks.
• Lower reliance on moneylenders: formal credit reduces usurious debt traps.
• More enterprise and jobs: MUDRA and SHG loans support micro businesses.

(B) Better governance through DBT

When accounts are seeded with identity and mobile access, transfers can go directly to beneficiaries with fewer leakages. This improves service delivery credibility, and reduces transaction costs for the state.

(C) Women empowerment

SHGs combined with bank linkage and microcredit increase women's control over financial resources. This improves bargaining power in households and encourages participation in local governance and community decisions.

(D) Formalisation and financial footprint

Digital payments create transaction trails. Over time, these trails can support better credit scoring and targeted financial products, moving households from survival credit to productive credit.

12) Challenges in India's financial inclusion journey

(A) Access challenges

• Remote geography: distance and poor connectivity affect last-mile services.
• Documentation gaps: migrants, homeless, and informal workers may struggle with KYC.
• Branch/BC viability: low transaction volumes can make last-mile points unviable.

(B) Usage challenges

• Account dormancy: accounts may exist but remain inactive unless linked to benefits/transactions.
• Low trust: fear of charges, fraud, or unfamiliarity can reduce usage.

(C) Quality and consumer protection challenges

• Mis-selling: insurance/loan products sold without full understanding.
• Digital fraud: scams and social engineering attacks reduce confidence.
• Microfinance stress: multiple borrowing and weak assessment can cause distress; RBI framework focuses on repayment capacity and transparency.

(D) Inclusion vs over-lending (a subtle Mains point)

Inclusion is not equal to "more loans." Inclusion means appropriate, affordable, transparent finance matched to repayment capacity and livelihood patterns. Otherwise, microcredit can create cycles of debt.

13) Way forward: what India should focus on next

(A) Move from "coverage" to "deep usage"

• Make accounts active through regular inflows (wages, benefits) and easy cash-in/cash-out.
• Improve customer experience at BC points (cash availability, uptime, grievance support).

(B) Stronger financial literacy and consumer protection

• Simple, local-language product explanations (interest, charges, repayment schedules).
• Faster grievance redressal and fraud resolution.

(C) Responsible microcredit expansion

• Strict repayment capacity checks (aligned with RBI's repayment obligation cap).
• Prevent multiple lending without visibility; promote credit registry usage and better data sharing.

(D) Strengthen PSL quality (not just quantity)

• Encourage productive lending to SMFs, micro enterprises, renewable energy and social infrastructure within the PSL framework.
• Use PSLC markets to improve system efficiency while maintaining real credit flow.

(E) Keep digital payments safe and inclusive

• Focus on feature-phone and low-bandwidth payment solutions.
• Improve cyber awareness and security-by-design for payment apps.

14) UPSC Prelims Quick Revision (high-yield points)

• PMJDY provides basic accounts, RuPay card insurance cover, and OD facility up to ₹10,000 for eligible holders.
• PMJDY scale: 57.49 crore beneficiaries and ₹287,578.31 crore balance shown on portal.
• MUDRA categories: Shishu (≤₹50,000), Kishore (₹50,000–₹5 lakh), Tarun (₹5–₹10 lakh).
• FY 2024–25 PMMY: ~5.47 crore loans sanctioned; ~₹5.53 lakh crore sanctioned amount (MUDRA portal).
• DAY-NRLM: 10.05 crore rural households mobilised into 90.9 lakh SHGs; Bank Sakhis deployed (PIB).
• RBI FI Index: 67 in March 2025; 64.2 in March 2024.
• UPI December 2025: 21.63 billion transactions; value about ₹28 lakh crore (NPCI stats).
• PSL targets (2025 directions): Total PSL 40% for domestic banks; Agriculture 18%; Micro enterprises 7.5%; Weaker sections 12%; UCB PSL 60%.

15) UPSC PYQs (with approach)

16) Practice MCQs (UPSC Prelims level) – with Answers and Explanations

1. PMJDY primarily aims to:

   • A) Provide housing loans to poor
   • B) Promote women SHGs in backward areas
   • C) Promote financial inclusion through universal access to banking
   • D) Provide direct cash grants to all citizens

   Answer: C

   Explanation: PMJDY is the National Mission on Financial Inclusion to bring unbanked adults into the formal banking system.

2. Which one of the following is correct about PMJDY overdraft?

   • A) OD is mandatory for all account holders
   • B) OD up to ₹10,000 is available to eligible account holders
   • C) OD is only for urban account holders
   • D) OD requires collateral

   Answer: B

   Explanation: PMJDY scheme details and continuation decisions mention OD up to ₹10,000 for eligible holders.

3. MUDRA "Shishu" category covers loans up to:

   • A) ₹25,000
   • B) ₹50,000
   • C) ₹5 lakh
   • D) ₹10 lakh

   Answer: B

   Explanation: MUDRA offerings list Shishu as loans up to ₹50,000.

4. Which of the following best describes RBI's FI-Index?

   • A) It measures only bank branch density
   • B) It measures inflation impact on poor
   • C) It measures access, usage, and quality of financial inclusion across sectors
   • D) It measures only UPI growth

   Answer: C

   Explanation: FI-Index is a composite index tracking access, usage, and quality across multiple financial sectors.

5. As per RBI PSL Master Directions (2025), the total PSL target for domestic commercial banks is:

   • A) 20% of ANBC
   • B) 30% of ANBC
   • C) 40% of ANBC/CEOBSE
   • D) 60% of ANBC

   Answer: C

   Explanation: The table in Master Directions 2025 states total priority sector target as 40% of ANBC or CEOBSE (whichever higher) for domestic commercial banks.

6. UPI is operated as a payment system by:

   • A) RBI alone
   • B) SEBI
   • C) NPCI
   • D) IRDAI

   Answer: C

   Explanation: NPCI publishes UPI product statistics and runs UPI as a retail payment system.

7. DAY-NRLM primarily works through:

   • A) Large industries
   • B) Self Help Groups and community institutions
   • C) Only direct cash subsidies
   • D) Only urban employment programmes

   Answer: B

   Explanation: DAY-NRLM mobilises rural households into SHGs and strengthens livelihoods and financial inclusion.

8. Which is a key consumer protection feature in RBI's microfinance framework?

   • A) No need to assess repayment capacity
   • B) Household repayment obligations capped at 50% of monthly household income
   • C) Mandatory collateral for all loans
   • D) Prepayment penalty is compulsory

   Answer: B

   Explanation: RBI's microfinance directions include a cap of 50% of monthly household income for repayment obligations.

9. Which statement is correct about PSLCs?

   • A) They are permanent and never expire
   • B) They allow transfer of PSL achievement and expire by March 31
   • C) They are issued only for UPI targets
   • D) They are issued by SEBI

   Answer: B

   Explanation: RBI instructions enable PSLC trading and RBI FAQs note PSLC expiry by March 31.

10. India's digital payments growth (FY 2017–18 to FY 2024–25) is best described as:

    • A) Stagnant, with little change
    • B) Declining volume but rising value
    • C) Strong rise in both volume and value as per DFS release
    • D) Growth only in RTGS, not retail payments

    Answer: C

    Explanation: DFS/PIB release reports strong growth in total digital transaction volume and value between FY 2017–18 and FY 2024–25.

Conclusion

Financial inclusion in India has moved from "branch expansion and social banking" to a powerful combination of mass account access (PMJDY), microcredit (MUDRA, SHGs, regulated microfinance), digital payment rails (UPI and broader digital payments), and directed credit policy (PSL). The next phase must focus on deeper usage, safer digital finance, strong consumer protection, and responsible lending—so inclusion leads to sustained empowerment, not just formal entry into the system.