Financial inclusion has been a crucial goal for policymakers and financial service providers over the last decade. Tremendous progress has been made in bringing people into the formal financial system, ensuring access to financial services for many individuals across India. However, the focus must now extend beyond mere access to finance. Financial health is the new imperative - encompassing access, usage, diversification, and quality products and services. 

Empowering citizens with the means to achieve financial well-being strengthens individual households and fosters economic stability and growth at the national level. Let us examine strategic approaches that policymakers in India can implement to promote and safeguard the financial health of its diverse population.
Making Financial Health a Priority
At the core of the financial sector's mission lies the responsibility to support citizens in securing their financial future. To achieve this, policymakers must unequivocally prioritize financial health as an overarching goal.

The goal doesn't stop merely at financial inclusion through measures like opening bank accounts or providing insurance coverage. To be truly effective, policies should equip individuals with the tools to manage, save, grow, and protect their money, thus helping them build financial resilience against economic shocks and enjoy greater financial freedom.

Fig1. Understanding Financial Health 

By rigorously examining whether the existing financial system truly supports the transition from financial inclusion to achievement of financial health, policymakers can identify potential gaps and areas for improvement. 

Here are some of the policy gaps and areas of opportunity:

Access to Credit: While the MUDRA scheme does provide some degree of credit access to micro-enterprises, many people still face challenges in accessing formal credit. This is especially true for those lacking formal employment records, assets for collateral, or credit histories. A system that assesses creditworthiness using alternative data, like regular utility payments or rent, might be helpful.

Savings Enhancement: The current focus of schemes like PMJDY is primarily on the accessibility of bank accounts. But there's less emphasis on encouraging systematic savings habits. Creating incentivized saving programs, matching contributions, or offering higher interest rates for consistent savers could be beneficial.

Financial Literacy: There's a clear gap in terms of financial education. Most Indians lack the knowledge of basic financial planning, investment options, or even the nuances of the schemes they're enrolled in. A nationwide financial literacy program or integration of such education into school curricula could be instrumental.

Retirement and Pension Plans: While the Atal Pension Yojana targets the unorganized sector, the overall penetration remains low. More awareness campaigns and perhaps simplifying the registration and contribution process could boost enrollment.

Digital Literacy: As India moves towards digital banking and transactions, a significant portion of the population remains digitally illiterate. This hampers their ability to participate in the digital economy and makes them vulnerable to fraud. Policymaking should address this gap.

Safety Nets: While social protection schemes provide some coverage, having robust emergency funds or safety nets for events like natural disasters, pandemics, or economic downturns can enhance resilience.

Innovative Products: Tailoring financial products to suit the needs of different segments of the population can further drive financial inclusion. For instance, products catering specifically to women, the differently-abled, or certain occupational groups can be developed.

In India, where a significant portion of the population remains unbanked and underbanked, especially in rural and remote areas, promoting financial inclusion initiatives becomes a primary objective. Policymakers can address this challenge by incentivizing financial institutions to offer accessible and affordable banking services, make financial products customer-centric instead of industry-centric, and encourage the usage of formal financial products and services among underserved communities. Additionally, promoting the adoption of digital payment systems can bridge the gap between urban and rural areas, making financial services more accessible to remote populations.

Furthermore, combating predatory lending practices and providing robust risk mitigations are essential for safeguarding citizens from falling into debt traps. Policymakers can implement stringent consumer protection policies and empower financial institutions with appropriate guidelines, fostering a more transparent and responsible lending environment. This approach ensures that financial institutions prioritize the financial health of their customers and refrain from engaging in exploitative practices.

Promoting Digital Financial Services/ Innovations for Healthy Financial Behaviours.

Financial health is intrinsically tied to individual financial behaviors.

 Policymakers can be pivotal in promoting products and programs that encourage responsible financial practices. A great example is India’s Unified Payments Interface (UPI). UPI, drawing from the strengths of prior payment systems, offers a standardized, 24/7, device-agnostic payment method available via mobile phones, the internet, ATMs, and USSD. Unlike China's closed payment system dominated by fintech giants like Alipay and WeChat Pay, UPI had oversight from the RBI. Its adoption skyrocketed with India's booming smartphone usage, reaching 750 million, and Jio's entry in 2016 slashing mobile data costs by 96%. This change surged data consumption from 140 MB/month in 2015 to 14.04 GB/month in 2021. Furthermore, the 2016 demonetization accelerated the shift from cash to digital transactions. UPI's open API prompted innovations by private firms, resulting in a surge of UPI transactions due to its accessibility, fintech innovations, and user-friendly nature.

Fig 2. UPI monthly transactions have grown rapidly

Source: The Bank for International Settlements

Innovative financial products, such as commitment savings accounts, have demonstrated their efficacy in encouraging regular savings habits among individuals. Policymakers can incentivize financial institutions to offer such products by providing supportive regulatory frameworks and tax benefits, fostering a savings culture in India. Additionally, introducing micro-investment platforms and initiatives that facilitate investments in sustainable and socially responsible projects can instill a sense of purpose in financial decision-making, aligning financial goals with societal values. 

Technology can be a game-changer in promoting financial health. Policymakers can encourage the adoption of digital financial services and e-wallets, ensuring that citizens can easily access and manage their finances from their smartphones. Furthermore, mobile apps and online platforms can offer personalized financial management tools, empowering users to budget effectively, set realistic financial goals, and track their progress toward achieving them.

India's launch of the Account Aggregator (AA) framework has the potential to significantly transform the nation's credit system. This innovation aims to simplify the process for enterprises and individuals, particularly those lacking substantial financial records or collateral, to engage with formal financial entities. To truly grasp the impact of the AA, one must delve into the concept of the India stack — a Digital Public Infrastructure (DPI) birthed from a collaboration between the public and private sectors. DPIs serve as versatile digital platforms, standardized and open-ended, enabling institutions to deliver a range of services. The India stack is a tri-layered structure designed to endow every Indian with a digital identity, all the while promoting effortless, zero-cost, mobile-centric digital transactions. It's upon this foundational trio that the AA framework stands. Together, they form a robust ecosystem poised to amplify India's credit dynamics.
Collaborating Across Sectors for Systemic Change
Enhancing financial health requires a holistic approach that transcends the confines of the financial sector. Policymakers must forge collaborative partnerships with other sectors, including employment, social protection, and healthcare, to drive systemic change.

India's vast informal sector and burgeoning gig economy present both opportunities and challenges. Financial sector policymakers can collaborate with labor ministries to create more stable income opportunities for gig workers, thereby increasing their financial resilience. Additionally, working with social ministries can streamline the disbursement of social protection payments, ensuring that beneficiaries receive their entitlements promptly and securely.

Addressing social determinants of financial health is equally critical. Collaboration with education authorities can foster financial literacy programs in schools and colleges, empowering the younger generation with the knowledge and skills needed for sound financial decision-making. Moreover, partnering with healthcare providers can lead to innovative financing options for medical expenses, relieving the financial burden on individuals during health emergencies.
Using Measurement Insights to Identify Gaps
A data-driven approach is paramount in developing an effective action plan for improving financial health. Policymakers should employ comprehensive measurement tools and conduct in-depth analysis to understand the current state of financial health across diverse demographic segments in India.

Regional disparities and distinct challenges can significantly impact financial well-being in a nation as vast and diverse as India. For instance, seasonal incomes prevalent in agricultural communities necessitate tailored financial solutions to manage fluctuations in cash flow effectively. Policymakers can collaborate with financial institutions to design specialized products that cater to the unique needs of such communities, offering flexible savings schemes and credit options that align with their income patterns.

Moreover, insights from data analysis can illuminate the impact of unforeseen events like health emergencies on financial stability. By acknowledging such vulnerabilities, policymakers can develop targeted solutions, such as introducing health insurance products or facilitating health savings accounts, thereby providing a safety net against unforeseen medical expenses. Furthermore, enhancing access to credit during emergencies can prevent individuals from resorting to informal sources of financing, which can exacerbate their financial distress.

The financial health of India's citizens is an indispensable component of the nation's economic progress and stability. By making financial health a central priority, leveraging measurement insights to identify gaps, collaborating across sectors, and promoting products and programs for healthy financial behaviors, financial sector policymakers can contribute significantly to the well-being of India's diverse population.

Empowering individuals with the tools and knowledge to make informed financial decisions uplift individual households and fuel a vibrant and prosperous economy. As India embraces a more inclusive and tech-savvy financial ecosystem, policymakers must prioritize financial health, ensuring that the benefits of economic growth are accessible to all and that the nation advances toward a brighter financial future for its citizens. Through strategic policymaking, India can build a resilient financial system catalyzing its people's prosperity and well-being.