Money & Finance

Achieving financial inclusion: Going cashless

  • Blog Post Date 06 April, 2016
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Bappaditya Mukhopadhyay

Great Lakes Institute of Management

A World Bank survey reveals that while about half of all individuals in India had bank accounts in 2014, only 12% had made a cashless transaction in the past year. In this article, Bappaditya Mukhopadhyay, Professor of Economics and Finance at the Great Lakes Institute of Management, contends that cashless transactions can be encouraged by ensuring that payments – beyond government transfers - are made directly into the bank accounts of recipients.

Historically, the way we have approached financial inclusion is odd. For quite a while now, financial inclusion has merely been about ‘providing access’ to the unbanked population through opening of bank accounts only. Without addressing the question of ‘what next?’, most of these accounts have gone dormant. While access to bank accounts is a necessary condition for financial inclusion, it is far from being sufficient. The Pradhan Mantri Jan Dhan Yojana (PMJDY)1 does provide the necessary infrastructure but how do we ensure that individuals with bank accounts actually start utilising them? The answer lies in encouraging them to go cashless. Going cashless is a measurable objective for financial inclusion and it itself shows the processes and instruments to get there. Integrating the objective of financial inclusion with going cashless would mean that merely opening bank accounts is no longer the end goal. PMJDY, coupled with efforts towards a cashless payment system, can achieve financial inclusion.

The decision to go cashless

In 2014, World Bank undertook a survey of 146,647 individuals to study financial inclusion across the globe. From India, 3,000 individuals were surveyed. The data from India revealed that 53.14% of all individuals had access to bank accounts out of which 53.12% accounts are dormant, that is, there have been no transactions in the last one year. This means, 28.23% of all individuals have accounts that they use while only 12.44% of all the individuals have made a cashless transaction in the last one year2. The objective of financial inclusion should be to boost up the 28.23%. If one focuses only on the banked population, the major factor that influences the decision to go cashless is the nature of inflow into one’s account. After controlling for education, gender, income and type of occupation, I find that individuals who receive payments in their accounts are twice as likely to make cashless payments as those who do not receive such payments in their accounts (Mukhopadhyay 2015b).

The reason is plain to see. The decision to go cashless is mainly driven by convenience. However, if inflows into bank accounts are absent, to make cashless payments an individual has to first incur an additional cost of converting cash to bank balance (deposit the money into the account) and then use it to make cashless payments. Clearly, to encourage individuals to use their accounts, the accounts must have substantial inflows. The government’s initiative to credit benefits directly into the bank accounts of recipients is therefore the right beginning. However, the sole emphasis on government transfers, in the context of moving towards a cashless payments system, is misplaced as (i) less than 6% of all individuals receive such transfers in their accounts, and (ii) such transfers form a small part of most household budgets.

Remitting informal sector payments directly into bank accounts

What can work? With more than 93% of the labour force engaged in the informal sector and with 68.8% workers without any formal employment contract, getting payments remitted directly into their accounts will require interventions. For the urban unorganised sector, the emphasis should be on getting their payments directly remitted to their accounts given there does not exist any formal contracts between them and the remitter. Currently, these are typically done as cash remittances. In my earlier I4I column, I had established that if households have an incentive to keep records of financial transactions (example, tax benefits in case of house rent), they are more likely to incur non-cash expenditures3. But in addition, incentives also have to be in place for the remitter. Cashless payments are part of a network: A making cashless payments to B increases the probability that B will do so too in his transaction with C. The right step therefore would be to provide tax benefits for payments made towards informal sector services. Simply put, crediting payments to the accounts of drivers, household help and the rest of the entourage of informal sector services is the starting point.

Leveraging the MFI network to encourage cashless transactions in rural areas

However, attaining financial inclusion through the use of cashless instruments in rural areas requires a different approach. A study undertaken by India Development Foundation (IDF) in 2010-11 finds that less than 0.5% of all payments in rural areas are made through cashless instruments (Mukhopadhyay 2015b). What is needed here is a mechanism to incentivise the cashless network to function. In other words, someone needs to be incentivised to make the cashless system function. This is where one must utilise the local institutions. The same is highlighted in (Ravi and Ghakar 2015). Microfinance institutions (MFIs) can play an important role in this context.

In India, MFIs have a widespread reach especially in rural areas, often assuming the role of financiers for the entire community. For example, in a typical village, most households as well as local shop owners are MFI clients (often the same MFI). They rely on MFIs to provide financial literacy. This network should be utilised by incentivising the MFIs to develop and maintain the critical network of cashless transactions. Simply put, an MFI could be given a certain percentage of all cashless transactions in its network. The total amount of incentive would be substantial given over 200 million households are connected to MFIs. There is a perfect platform for MFIs to promote financial inclusion if one identifies the correct instrument and process, and then see how MFIs fit in (Mukhopadhyay and Rath 2011).

We have managed to identify the correct framework by linking government transfers to banks accounts; however, not making the correct intervention (incentivising other remitters to make payments directly into the accounts of recipients) will make us miss the bus again. Financial inclusion for all will then remain a distant dream.


  1. PMJDY is the Indian government’s flagship financial inclusion scheme. It envisages universal access to banking facilities with at least one basic banking account for every household; financial literacy, access to credit insurance and pension facility.
  2. Most bank transactions involve either depositing or withdrawing cash. This is different from making cashless transactions where one uses bank accounts to make payments directly. 
  3. he column also identifies the possible instruments that can work to promote cashless transactions.

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