Should Financial Inclusion Have Human Development As Essential Metric?

True financial inclusion is not merely about providing access to banking services—it's about enabling lives to flourish beyond financial entry points. To have meaningful impact, financial inclusion must be closely aligned with human development goals. While designed to provide essential services such as savings, credit, and insurance at affordable costs, current financial inclusion metrics focus largely on access points—like account openings and ATM availability—rather than addressing critical aspects of human development. This narrow focus can lead to a superficial framework, where individuals formally enter the banking system, but remain under-resourced and vulnerable, unable to use these services for real socioeconomic progress.

The broader question then becomes: can financial inclusion achieve its potential if it doesn't address foundational needs like health, nutrition, and education? In a nation where millions still suffer from malnutrition and lack access to quality healthcare and education, genuine inclusion requires a more comprehensive approach. For instance, a malnourished population cannot effectively participate in or contribute to the economy, introducing systemic risks. Such a society may face long-term productivity declines, escalating healthcare costs, and possible social unrest—all of which could undermine the very resilience that financial inclusion aspires to build. True economic empowerment, then, requires that financial inclusion supports these fundamental elements of human capital.

India's Human Development Index offers a mixed picture—while there has been notable progress, deep-seated issues persist. Financial inclusion intersects closely with HDI parameters, as access to credit and savings can empower families to invest in health, education, and livelihoods. When financial services are available, but unaccompanied by improvements in basic living conditions, the impact remains limited, underscoring the need for a holistic approach. Rather than measuring success by the number of bank accounts or loans, we must assess financial inclusion by its tangible impact on people's lives—whether it actually drives improvements in well-being, education, and healthcare access.

India's efforts towards a Unified Lending Infrastructure signal potential for more robust and fair credit assessment, leveraging alternative datasets and digital footprints. Yet, Indian financial institutions must challenge longstanding biases in how they assess consumers, especially in lower economic strata. A paradigm shift is required where institutions move beyond traditional risk aversion and instead design products to serve lower-income communities. If banks limit themselves to regulatory compliance without realising the market potential of underserved communities, they risk delivering only a perfunctory version of inclusion. Meaningful financial inclusion requires innovative risk pricing and investment in human-centred products, ensuring that the underserved aren't left behind as financial outliers.

Technology indeed amplifies the reach of financial services, as seen in India's Unified Payments Interface, with its billions of monthly transactions. However, technology alone does not guarantee empowerment; many newly banked citizens need financial literacy to avoid falling into cycles of debt rather than gaining empowerment. The RBI has promoted financial literacy, but to be effective, such initiatives must move beyond traditional media, utilising digital channels to engage today's users directly, especially in a way that resonates with mobile and digital consumption trends.

If financial inclusion is to achieve genuine social and economic impact, regulatory systems must embed human development metrics within their targets. Currently, most financial inclusion initiatives are evaluated based on the extent of access, such as the number of accounts opened or loans disbursed. However, these numbers often fail to capture whether individuals are truly benefiting in a meaningful way.

Integrating Human Development Index indicators—such as health, education, and standard of living—into financial inclusion goals would ensure that these efforts contribute not just to financial metrics but to overall human well-being. For example, prioritising financial products that support education financing, healthcare access, or even balanced nutrition could reshape inclusion from transactional access to a system that actively uplifts and stabilises communities. Regulatory benchmarks tied to HDI goals would encourage financial institutions to offer services that genuinely improve people's lives, ensuring that inclusion translates into a robust, resilient population ready to participate in the economy.

A human-centred approach to financial inclusion also mitigates long-term risks to the financial system itself. Without accounting for the health and well-being of the population, financial inclusion remains susceptible to setbacks; an economically unstable or unhealthy population can lead to higher default rates, lower productivity, and financial instability.

Regulatory policies that align financial inclusion with HDI priorities can help build a more resilient economic base by promoting inclusivity that reflects broader developmental goals. Such alignment would encourage innovation in financial products, prompting banks and institutions to adopt business models that support income growth, social mobility, and community health. In essence, financial inclusion should not be a standalone objective but a critical pillar of human development, allowing people to use financial tools as a stepping stone toward improved quality of life and economic security.

Ultimately, financial inclusion should serve as a foundation for economic participation, equipping individuals not only to save or borrow but to secure a better future. This requires a resilient, adaptable regulatory environment that can handle evolving risks while keeping human development at its core. The path to true financial inclusion lies in crafting a system where economic access is a gateway to lasting human development, with impacts that ripple across society and stabilise the financial ecosystem for future generations. Financial inclusion, when aligned with human development, becomes a foundation upon which resilient and equitable societies are built.

Srinath Sridharan is a policy researcher and corporate advisor.

Disclaimer: The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.